State regulators claim to be shocked, shocked, to discover such dastardly sales techniques, and have formed a committee to sniff out other violators. But except for a few sharp commissioners, their sniffers seem permanently on the fritz. For several years now, certain amoral companies and agents have touted insurance as a “private pension” or a “retirement savings plan”–superior even to tax-favored IRAs, Keoghs or 401(k)s. “That’s moral malpractice,” retorts consulting actuary Bruce Temkin, of Louis Kravitz & Associates in Encino, Calif. “Persuading individuals to use insurance in lieu of other, more appropriate retirement investments could actually prevent them from accumulating the assets necessary to retire.” The cost of the insurance you don’t need reduces the savings you might build.
Until recently, this type of dupery was pretty much a cottage industry. MetLife’s Tampa office, however, raised it to industrial strength. Nurses were the prey of choice. Calling themselves “nursing representatives,” Tampa salespeople carried their fake retirement plan into 37 states and inspired some copycats in other MetLife offices. A New York client, for example, thought she’d bought a retirement annuity; it, too, turned out to be insurance. even though as a single woman she didn’t need coverage.
Not every state was asleep at the switch. Back in 1990, the Texas commissioner warned MetLife to lay off its nursing ploy. MetLife sent out two rounds of admonitory letters. But even when it found continued wrongdoing in Tampa in 1991, it kept praising that office for generating such high sales. “No question we should have acted earlier,” says MetLife president Ted Athanassiades.
Florida blew the whistle last August and Met is now rapidly making repairs. Seven executives were fired. Some 18,000 of Tampa’s customers have been repaid or offered refunds, an offer that will also go to as many as 45,000 clients of other Metropolitan agents (the New York customer got $4,000). Georgia fined the company $250,000, the first of several probable forfeits. Total restitution might cost $30 million to $40 million. In the meantime. MetLife is auditing its offices and agents for suspicious sales patterns. “Not one customer is going to lose a penny,” Athanassiades says.
Buyers shouldn’t blame themselves for falling for any agent’s spiel. They may have received a misleading example of how the product might perform. Take the handout for the Professionals’ Alternative Plan prepared by Commercial Union Life Insurance of America, a company based in Boston. Mass. The handout compares the result of choosing CU’s “alternative plan” (life insurance) over a tax-deferred savings plan and shows guess-which to be the better. But to reach that result, CU secretly credited its plan with higher rates of interest. Jim Mallon, CU Life’s chief marketing officer, now says “the brochures are in need of serious editing.”
CU Life’s handout further asserts that cash-value insurance yields more retirement income even than tax-favored plans like IRAs and Keoghs. But when challenged to prove it, CU sent illustrations that don’t work, according to fee-only life-insurance adviser Peter Katt of West Bloomfield, Mich., an expert on insurance pricing. Because of different tax assumptions, the illustrations effectively credited more money to the life insurance than to the true retirement plan, Katt says–something a customer wouldn’t notice. With equal sums on both sides, the true retirement plan wins. Responds Mallon: “We don’t think our illustration is invalid.”
If you don’t need the life insurance, it makes no sense to use a cash-value policy to build retirement savings, MetLife’s Athanassiades says. A $100.000 policy issued by his own Tampa office proves the point. It was bought in 1992 by 29-year-old Sherry Horton of Toledo, Ohio, who paid $74 a month. Horton is currently suing MetLife. Here are her potential yields, as calculated by actuary James Hunt, a member of the board of the National Insurance Consumer Organization.
Horton’s agent projected that her policy would earn dividends at a 9.45 percent annual rate. Even at that, um, optimistic level, her 10-year return after paying sales commissions and other expenses would have been only 3.5 percent and her 20-year return, 7.4 percent.
Interest rates have declined–at MetLife, to 8.25, and with further drops ahead. If dividends fall to 6.45 percent, Horton’s 20-year return could net out to a mere 4.4 percent. This variability is typical of all whole-life policies, not Met’s in particular.
MetLife effectively charges a high interest rate for people who pay monthly rather than annually, Hunt adds. By his calculations, Horton’s installment payments cost her 18.3 percent in yield.
Hunt’s advice to MetLife holders who don’t need life insurance: if you’re offered a refund, take the money and run. If you can’t get a refund, however, you might as well stick with it. You’ve already paid your largest sales commission and other upfront expenses. From this point on, your investment returns should be roughly competitive with those of bonds, and they’re tax-deferred.
Savers have plenty of alternatives. Tim Pfeifer of the consulting actuarial firm Milliman & Robertson, in Chicago, says that first, you should fully fund your tax-favored retirement options: company 401(k) plans, 403(b) plans for teachers and others, Individual Retirement Accounts or–for the self-employed, Keoghs and simplified employee plans (SEPs). Then there are mutual funds and tax-deferred annuities. Annuities work if held for 15 or 20 years.
Will MetLife’s distress inspire cleanups elsewhere in the industry, shot through as it is with deceptive sales techniques? Probably not. The reformers so far have been trying to teach a pig to sing, which wastes the breath and annoys the pig. Time to try another tack.
