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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

‘Vanishing Premiums’ Never Did Sales Pitch Used In ‘80s Leaves Customers In Bind

Boston Globe

The pitch was almost irresistable.

The insurance agent sat there in your living room with his personal computer on the coffee table, and up popped illustration after illustration showing how high interest rates and the resulting high dividends would produce a life insurance policy that would pay for itself in just seven to 10 years, maybe less.

There were no guarantees, the small print probably noted at the bottom. But not to worry: The company had not reduced its dividend scales in 50 years.

Such spreadsheet selling was a big part of the insurance industry’s efforts in the 1980s to take advantage of double-digit interest rates, and it produced a big boom in sales of socalled “vanishing-premium policies.”

The problem: The premiums haven’t vanished, and millions of policyholders are still paying bills they expected to be done with long ago. Policyholder suits have grown along with their anger.

The explosion of litigation has given the industry a black eye, has contributed to a nearly 10 percent drop in new insurance sales last year, and has given ammunition to competitors such as mutual funds.

Not all the complaints about insurance sales practices involve vanishing premiums; the charges can be grouped in three broad categories:

Churning, or selling unneeded policies to generate fresh commissions, often by a sales pitch offering “free” insurance that is actually paid for by drawing cash from an existing policy.

Misrepresenting insurance policies as retirement or savings plans, and failing to adequately disclose that much of the investment will go to buy a death benefit and pay agent commissions.

Vanishing premium policies, which were supposed to pay for themselves in as little as five years through an accumulation of doubledigit dividends.

With interest rates - and thus dividends - declining in the last decade, policyholders have been left making premium payments for many more years than expected.

The charges have produced hundreds of suits and a handful of settlements.

Metropolitan Life Insurance Co., the nation’s No. 2 insurer, agreed to settle for $42.5 million last year, and New York Life Insurance Co. came to a preliminary agreement in August that will cost it an estimated $65 million.

Vanishing-premium policies have also been coming under increasing fire outside of court. Money magazine in August counted them among “The Eight Biggest Rip-Offs in America,” noting that agents typically pocket 55 percent or more of the first-year premium plus another 5 to 8 percent of subsequent annual premiums.

The concept was born in the marketing department of the now-defunct Executive Life Insurance Co. of Los Angeles, and was popularized in the double-digit interest rate environment of the mid to late 1980s.

The problems came in the high-interest assumptions agents plugged in to the computer-aided illustrations, and a failure to communicate adequately to policyholders that the dividends designed to pay the premiums in the future could fall as well as rise.

Robert Nelson, an Omaha insurance executive who also serves as chairman of the National Association of Life Underwriters’ task force on sales illustrations, says there is nothing wrong with the concept of vanishing-premium policies.

“What is bad is for people not to understand that they will change for the better or the worse because our economy will continue to change.” And, he adds, “in most cases” that wasn’t adequately communicated to consumers.

The industry and regulators are trying to check the damage. The National Association of Insurance Commissioners is working on new rules that, if approved, would govern the use of illustrations in sales presentations and ban the promise of a vanishing premium.

But some of the industry’s most persistent critics think this is all too little, too late. Joseph M. Belth, editor of the insurance forum, an industry newsletter, first started forecasting the bomb underlying vanishing-premium policies in 1985, warning of “the coming era of disillusionment.”

The problem, he says today, is at base one of nondisclosure of important information to consumers, and an “industry that fights disclosure as an all-out war.”