Where is our Rosa Parks to stand-up to the life insurance industry’s crimes?

Where is our Rosa Parks? Our Thurgood Marshall? Our Thomas Paine? When will some life insurance industry policyholders stand-up against the industry’s financial crimes like Rosa Parks did against racial and social injustice? Where are those like Thurgood Marshall in Brown vs. Board of Education who will advocate for consumers’ civil rights to be free from financial deceptions and misrepresentations and against the life insurance industry’s age-old financial injustices?

New York Life and Northwestern have recently run very deceptive advertisements in leading financial publications. These two insurers are often cited by many as upstanding corporate citizens; but they really are not. While they are financially strong, New York Life and Northwestern, with and via their agents, engage in pervasive fraudulent conduct in the life insurance marketplace. At its source, these companies’ misconduct – like that endemic to their industry – arises from inadequate product disclosure, which sets the stage for agents, motivated with undisclosed financial incentives, to misrepresent products and fleece consumers. The story is as old as the marketplace. When financial products are not properly disclosed, as they have not been on cash value life insurance (not to overlook annuities and long term care policies – this industry’s two other big products, with different but similar problems), the competitive market does notand in fact cannot properly function.

In recent years, we have all most painfully seen and experienced the consequences of markets operating without enforcement or morality. The crimes in the subprime market were extraordinary, pervasive, and, in fact, in plain sight. Yet ten years ago the few who might have occasionally talked about the fraud in the subprime mortgage markets were dismissed. Virtually no one in positions of responsibility or authority took any appropriate actions to avert our financial system’s near meltdown.

The crimes in the life insurance marketplace are not as cataclysmic, but they are profoundly harmful and they have been around for generations. A century ago P. B. Armstrong, Vanguard founder Jack Bogle’s great grandfather, wrote a book, A License to Steal, about the life insurance industry. For the past fifty years, Professor Joseph Belth has written about the industry’s problems; his award-winning monthly newsletter is legendary. About thirty years ago, the Federal Trade Commission wrote such a scathing indictment of the life insurance industry’s practices that the industry lobbied Congress to enjoin any further Federal action. Consequently, no one should really be surprised to hear that the new Consumer Financial Protection Bureau does not have authority over the life insurance industry’s products.

Civil rights have never been bestowed to any passive or silent group; that is not the way to get the powerful to respond. And businesses in our country operate on the basis of power. Below are brief summaries of two separate articles about New York Life and Northwestern’s deceptive and harmful advertisements. It is safe to assume that their agents’ spoken sales presentations go far beyond the ad’s misrepresentations; in fact, with respect to Northwestern agents, I have specifically documented such in my January 2011 letter to the NAIC President.

But again until someone, like Rosa Parks, stands-up to say, ‘I’m not going to take this, I’m not going to allow my family to be shortchanged by the life insurance industry’s fraudulent and deceptive practices,’ the misrepresentations and harms will continue. After all, everyone saw and knew that Mr. Brown’s school was terribly unequal to Mr. White’s, but change only came after Thurgood Marshall began that fight for Brown’s civil rights.

New York Life’s Deceptive Advertisement

New York Life’s claim that its whole life policies provide “guaranteed annual growth” is an intentional perversion of the truth in order to induce another to part with something of value. And that, by definition, is fraud. A whole life policy does not provide “guaranteed annual growth” unless the guaranteed investment returns exceed the guaranteed insurance expenses, and for typical whole life policies there are many policy years in which such returns do not exceed such expenses. The ad, in its avoidance of policy costs, follows the age-old pervasive deceptive practices that have characterized the life insurance industry for generations. The ad is also replete with multiple additional problematic aspects, including material omissions and statements contradicting New York Life’s actual policy contracts. New York Life’s ad is terribly deceptive and irrefutably indefensible.

That New York Life’s ad ran in several leading national magazines for nearly two years – its fraud apparently going undetected by both insurance regulators, who no doubt saw it, and by these publications’ own quality control and business section editors, some of the publications are in fact known as leading financial publications – should be a clear and strong warning about these organizations’ professional competence, genuine knowledge about life insurance, and commitments to enforcing either legal or ethical standards. I recognize that the prior sentence will, at least initially or at first blush, hardly endear me to these possible allies in my efforts to reform the life insurance industry. But such stark truths, I am sorry, must be unequivocally stated and recognized if the public is to grasp the extent of the problems in the life insurance marketplace – a marketplace whose three leading products, life insurance, annuities, and long term care insurance, are all riddled with profound problems of sales misconduct arising from inadequate disclosure.

Northwestern’s Deceptive Advertisement

Northwestern’s ad is deceptive on multiple counts. It is untruthful because it materially misrepresents the differences in policy performance among the different insurers. The ad’s “number” for MetLife is shockingly erroneous, Northwestern had to know it was wrong, and yet the company used it anyway. Northwestern also represents the data behind the ad as comprehensive when they are not; therefore the ad’s broad claims and implications have not been and, in fact, cannot be documented. The ad’s claim that the results are unbiased is itself untruthful and indefensible because the ad’s touted “results” are based on an inherently problematic approach biased by premium size that misleadingly benefits Northwestern’s policy. The ad’s failure to mention this critical fact is a material omission. The ad is deceptive and clearly has the capacity and tendency to mislead and deceive because its assertion that its analytical approach provides “the one number” consumers need to know cannot be defended; in fact, Northwestern has actually argued privately elsewhere for other approaches when that has served its interests. Moreover, Northwestern touts the “20 year cash value return” as the “the one number” consumers need to know when fewer than half of its consumers even keep its touted policy for sixteen (16) years; so statistically speaking Northwestern knows that its touted “number” is not even relevant to its typical consumer, and its policy’s “returns” over all of the policy’s first nine years are actually negative. Furthermore, the ad facilitates misrepresentations by failing to specify the legal name of the product it references, which is significant as comparatively few of the company’s policyholders have bought the policy and received its touted “results.” Finally, but still of paramount importance, Northwestern’s ad is inherently misleading in its use and in its encouragement that consumers use and rely upon historic data without mentioning any of the necessary critical caveats to using past performance data. Given that Northwestern agents cite the company’s advertising, the ad thereby clearly and immeasurably facilitates deception of consumers by the company’s agents.

Closing Thoughts

The dictionary defines anomie (or anomy) as “a state of society in which normative standards of conduct [or belief] are weak or lacking.” Appropriate product disclosure is imperative for the proper functioning of a financial marketplace, and yet the life insurance industry’s products have never been properly disclosed. That is, the normative standard of conduct for fair exchange has been lacking. Despite fifty (50) state insurance commissioners and their more than forty (40) years of work since the late Senator Philip Hart in the early 1970s first began to talk about the idea of holding Congressional hearings on the scandalous life insurance industry and about the need for ‘truth in life insurance legislation,’ no meaningful reform has been accomplished. The anomic condition of the life insurance industry has simply been preserved, and with it, its marketplace’s terribly costly dysfunction.

The life insurance industry could be a very good industry, properly fulfilling society’s needs. Its agents, rather than widely perceived as hucksters, could be venerated like knowledgeable financial risk management doctors. Its consumers, rather than being suspicion, afraid, and uninformed, could be confident, proud and grateful policyholders.

The Corvair was not driven from the marketplace by regulation; it was driven from the market by Ralph Nader and his book, Unsafe at Any Speed. Similarly, this transformation of the life insurance marketplace will be driven by information, as all such changes fundamentally are.

Dissemination of information is the duty of our nation’s media, often referred to as either ‘our fourth branch of government (in the best meaning of government)’ or as that behemoth network of corporate and political public relations spin doctors. The financial media now needs to show American consumers of the life insurance industry’s products that it can truly function as the better angels our forefathers envisioned it being. Where are our Thomas Paines and Benjamin Franklins spreading pithy maxims, “Common Sense” and the vital truths about the life insurance industry’s products?

Please read the two Breadwinners’ articles (contained in the Archives) on New York Life and Northwestern’s deceptive ads, and share them with your friends and associates. Together, we can fix the life insurance industry and marketplace. An informational tsunami is coming, and it will cleanse the life insurance marketplace so it can be rebuilt with proper product disclosure. I welcome your assistance. I welcome your thoughts.

Sincerely,

R. Brian Fechtel, CFA & Agent