Better Keep Money in a Mattress : Celebrities’ Pitches for Life Insurance Leave Out Key Facts
If you watch television, you have probably seen Ed McMahon, Dick Van Dyke, Danny Thomas, Art Linkletter or some other sincere television personality trying to sell life insurance policies for people over the age of 50. Thomas, for example, tells us that the policies he endorses, which guarantee acceptance to anyone, offer “top-notch coverage” and “provide a perfect opportunity to increase your family’s security.” However, most people over 50 would be better off putting their money in the bank--or even in a mattress. Here’s why:
Most mail-order policies offer no benefits the first two years, no benefits after age 79 and sharply declining benefits in between. For example, a man who has just turned 57 can buy $8,750 in life insurance from the company Danny Thomas endorses for $297 per year. If he dies when he is 57 or 58, his beneficiary gets nothing, because of the two-year exclusion period. If he dies at 59, his beneficiary gets $8,750--in which case the insurance would be a good value, since he only paid $891. But if he lives until 70, the benefits under the policy drop to $3,250, after he has paid $297 for each of the last 15 years, or a total of $4,455--which would equal $6,410 had he put it in a savings account earning 5% interest. If he lives until 80, his beneficiary would get nothing--after he has paid $7,425 in premiums and forgone $6,744 in interest.
Better insurance at a much lower price is available. Most mail-order policies offer so-called “decreasing term” insurance, under which the premium stays the same but the benefits decrease over time (which the companies seldom mention in their television ads). With “annual renewable term” (ART) insurance, on the other hand, the benefit remains constant while the premium increases slightly each year. Because ART is simple and understandable, offers the greatest protection at the lowest cost and is subject to vigorous price competition, it is clearly a much better value.
For example, for the same $297 a year that Danny Thomas invites a 57-year-old man to pay for a $8,750 policy that becomes a $3,250 policy in 13 years and a worthless policy in 23 years, and contains a two-year exclusion period, he could buy $35,000 of life insurance with no exclusion period in the normal market. If he chose to keep his annual premium level, at age 69 it would buy $11,000 of coverage in the normal market, compared to $3,750 in coverage at age 69 from the firm endorsed by Thomas.
Most older people do not need life insurance anyway. Life insurance is to provide for the insured’s dependents if he dies prematurely-- not at or near the end of a normal life span. People who want to provide for their families after they retire will have more to give them if they save or invest what they would have spent on life insurance.
Insurers seek to justify these mail-order policies on the grounds that people who buy them are likely to be severely ill and unable to get insurance elsewhere. But for those who will die in less than two years the policies are worthless. And the advertisements are targeted at everyone over 50--not just the gravely ill. Moreover, even many people who are gravely ill can get insurance at substantially less than the mail-order insurance companies charge.
Why do celebrities endorse these policies? The obvious answer is, “for the money.” One company offered a congressman $600,000 for an endorsement--which the congressman, much to his credit, turned down. Some endorsers may not understand the true nature of the policies they are endorsing. But they should make it their business to find out.
Perhaps most puzzling, however, is how these advertisements can remain on the air. The Federal Trade Commission normally can prosecute “unfair or deceptive” advertising. Ads that fail to mention that benefits decline under the policies, or that no benefits are payable if the insured dies within two years, would appear to be unfair or deceptive and thus subject to commission prosecution. Insurance companies, however, are exempt from FTC scrutiny. In fact, when the FTC in 1979 released a report evaluating the different types of life insurance policies, Congress barred it from even studying the industry. Thus, only the states can prosecute deceptive insurance advertisements. Unfortunately, most state insurance commissioners do not have an “arm’s-length” relationship with the industry they are supposed to regulate, according to the U.S. General Accounting Office; the commissioners typically come from and return to the industry.
These mail-order insurance advertisements are a good example of a practice that the commission could prohibit if it had jurisdiction over the insurance industry, and which the states must prohibit since the commission cannot. If the states don’t act to either correct or prohibit these advertisements--and so far very few have--then perhaps Congress will conclude that it is time to repeal the $398-billion insurance industry’s exemption from FTC scrutiny.
