The deception du jour involves “churning” – a contemptible tactic that guts the savings you build up inside a traditional whole life policy. Here’s how it works. An agent calls and says, “Hey, I know a way you can get more insurance for little or no cost. When you die, your loved ones will be better off.’ Sound good? You bet. But here’s the catch. The new policy actually does cost more – a lot more. If you bite, the extra cost will be subtracted from the savings (known as the “cash values”) that built up in your policy over the years. You are actually taking a hidden loan against those savings – which churners, by the way, call “juice.” When the cash values are used up, your policy will lapse. Goodbye, life-insurance savings. Goodbye, security for your spouse. Older people are special targets, because that’s where the money is.
No one knows this better than Carol Nicholson of Alton, Ill., who has joined in a lawsuit against the Prudential Life Insurance Co. of America. For years, her husband, Keith, had carried four Pru policies worth around $30,000. Then agent Homer Gernigin sold him a new $100,000 policy, which, the lawsuit alleges, was supposed to cost nothing out of pocket.
It didn’t work that way. Unbeknown to the Nicholsons, the lawsuit claims, they were borrowing against the cash value in their old policies to pay for the new one. When the cash value was used up, the new policy lapsed – something else Carol didn’t know. The Nicholsons got notices about the lapse and the loans. But, she alleges, the local Pru office said not to worry – that was just “inside” paperwork; all the policies were OK. Carol thought they had $130,000 in coverage. But when Keith died of leukemia last year, she was appalled to learn that she could collect only $22,000.
Prudential won’t comment on this pending lawsuit. The Illinois Department of Insurance is investigating Pru’s sales in the state. Former Pru agent Michael Weaver, who used to work in the Alton office, says he saw forms for taking out loans against policies, signed in blank by clients who, like the Nicholsons, didn’t know they were borrowing (what they signed were “disbursement” forms, which could pass as routine paperwork). Weaver says he complained about the churning back in 1991. Later he was fired for low sales production and has just sued. Pru spokesperson Robert DeFillippo says that Alton was being investigated before Weaver spoke up and that no loan forms were found there signed in blank.
In Los Banos, Calif., Joyce and Roland Ocken say they succumbed to a pitch by former Metropolitan Life Insurance agent John Steele. According to a complaint the Ockens prepared for California’s Department of Insurance, Steele told them MetLife was trying to get rid of older policies, but that he could replace them with increased insurance at a rock-bottom price. They agreed to buy, paying $75 a month. Too late, they found out that that wasn’t enough to keep their new policy paid for life. In 15 years, when Roland reaches 79, the insurance may run out – leaving Joyce without this protection. Steele, now with Allstate, says he didn’t mislead the Ockens and that nothing is wrong with the policy.
As aggrieved buyers speak up, lawsuits proliferate. One is brewing in Florida against Prudential. Policyholders in Pennsylvania have brought churning charges against John Hancock Mutual Life and New York Life. Pennsylvania’s insurance department is exploring the sales practices of Pru, John Hancock, American General Life, Allianz Life and Monumental Life. In Rhode Island last year, the insurance department found some John Hancock agents engaged in “significant misrepresentation and illegal replacement.” New York recently levied a $500,000 fine on National Benefit Life (a subsidiary of Primerica Financial Services), in part for using deceptive sales materials to get people to drop their old policies and buy new ones.
In California, MetLife cases are popping like mushrooms. Former Met agent Mark Colbert of Merced, Calif., has referred more than 250 complaints to the state insurance department. Colbert alleges that his superiors told him to keep quiet about the illegalities he found. Met fired him for insubordination and he, too, has sued. A California law firm will soon file a class action against the company.
The motive for this deception is money. Sales create comissions for an agent, which in turn create bigger bonuses for the bosses up the line. So the bosses, who ought to enforce honest selling, have an incentive to wink and nod. Senior executives like to blame their troubles on greedy low-level managers. But at MetLife, it was executive vice president Robert Crimmins who eased the rules that had made it hard for agents to churn their own customers. “Crimmins began to talk volume, volume, volume,” one former senior executive told me. “Our general attitude was that you could do certain things as long as you did them with discretion, meaning that you not get caught.”
MetLife’s former ethics overseer, Crosby Engel, says he was coerced into early retirement in 1991, after fruitlessly warning senior management about the rise in malfeasance among sales agents and managers. Two years later, the Florida insurance department exposed a fraudulent-sales scheme run out of MetLife’s Tampa office. For that caper, the company has paid more than $65 million in fines and restitution, plus more than $35 million for other improper sales. MetLife’s chief legal officer, Gary Beller, concedes that Crimmins’s move to ease the rules was not a good one, but, he says, “none of those decisions was made with the intent of doing harm to policyholders.” MetLife recently pulled agents out of Europe, because the company was afoul of insurance regulations there.
A recent lawsuit filed against Prudential also points the finger up the line. Rick Martin, a former Pru district manager in Paducah, Ky., alleges that his immediate superiors not only condoned churning but trained agents to do it. In 1992, Martin laid out some of his charges in a letter to a Pru attorney but says nothing changed. He was fired – he says for whistle-blowing; Pru says for not stopping “irregularities” by his subordinates. DeFillippo says Pru never condones churning and that using unauthorized training materials violates company policy.
Under the pressure of bad publicity and unhappy state insurance commissioners, many companies say they’re starting to hogtie the very cowboys they used to love. “There’s no greater believer than a convert,” says MetLife chairman Harry Kamen, “and one would say we are really converted.” Last year, MetLife added compliance officers to every sales region. A new watchdog computer scans for agents making questionable sales. Met is calling or writing to people who just bought policies to see if they got what they expected. The company also is writing to 20,000 to 30,000 current clients who, it appears, might hold policies that were improperly sold. If so, Kamen says, they’ll be fixed (for information, call 1-800metlife).
Met hasn’t figured out how to address the primary problem: the financial incentive that agents have to sell insurance to any warm body that comes along. Prudential, however, has an idea. At Pru, managers’ pay is no longer based only on sales commissions, says vice president James Tignanelli. More than half of their compensation now depends on such things as retaining clients, hiring quality people and conserving the cash inside life-insurance policies. As for the juicers, Tignanelli says, Pru now gives out more warnings, and puts more on probation or out the door. In yet another attack on fraud, Pru is trying salaried “case managers” who take most of a client’s application by phone.
As a general rule, cash-value policies should not be replaced. You’ve already paid the sales commission, so leave them alone and let them build. If you need more coverage, add a policy rather than ditch the one you have. MetLife has prepared a dandy booklet on the risks of replacement, soon to be mailed to 5 million policyholders. Other insurers might want to copy. If a churn artist offers you free insurance, just say no.
