Problem – Consumers

  • As William Douglas, the third commissioner in the SEC’s then-short life, said in 1937 of new disclosure rules:
    • “We can demand full disclosure of the facts, we can insist upon a market free of manipulation, we can fight fraud, but we cannot provide sound business judgment, nor can we save a fool from his folly.”

2008 1028 – WSJ – Storm-Proofing the Economy: A guide to Wall Street’s turmoil–and what to do about if, By Nicole Gelinas – [link]

⇒ 1937 1037 – The Pittsburgh Gazette – Your Business in Washington, by Marshall McNeil – [link-GoogleNews]

  • There is one obvious danger in all legislation relating to life insurance, and that is the tendency to supersede individual precautions again bad management, and to inspire a blind confidence in the checks and safeguards created by law. 

1877 0320 – NYT –  Life Insurance Reform – 1p

  • Duty to Read
  • Reasonable Person
  • Reliance

Problem – Company

  • 1949 – SOA – Some Actuarial Observations on Agency Management Problems, by Charles F. B. Richardson, Society of Actuaries – 46p
  • 1977 – SOA – Effective Product Management, Society of Actuaries – 12p
  • John Montgomery [California] asked how companies would control brokers who were selling insurance.

1994-3, NAIC Proceedings

  • Bob Wright said the Society of Actuaries report referred to the fact that companies said they had no control over what agents did.
    • [Bonk: Bob Wright = Chair of the LDWG – Life Disclosure Working Group – (A) – NAIC  —  [BonkNote]]

1994-4, NAIC Proceedings

1991-1992 – SOA – Final Report* of the Task Force for Research on Life Insurance Sales Illustrations, Society of Actuaries  —  [BonkNote]  —  142p

  • My next comment relates to the vanishing premium “payback.”
  • I guess I’d have to say I’m disappointed that companies haven’t defended themselves more vigorously in this whole situation.
    • Maybe the reason is that their agents didn’t do the proper job at the point of sale.
    • But if the agent did, and if the agents have a good file, and they’ve been following up since the point of sale/issue and have communicated properly to their clients the impact of interest rate changes on at least an annual basis, I don’t think we would have this problem.
  • I found it fascinating that the agent in the Crown Life case got $40 million for mental anguish.

—  Kevin A. Marti, vice president of administration and chief actuary for Westfield Life Insurance Company

1995 – SOA – Sales Illustrations, Society of Actuaries – 14p

  • 1993 0525 – GOV (Senate) – When Will Policyholders Be Given The Truth About Life Insurance?, Howard Metzenbaum (D-OH)  —  [BonkNote]
    • (p15) – Jerry Keating – I began my career with John Hancock Mutual Life Insurance Co. in 1965.
      • From 1982 to June 12, 1990, I was the staff manager in the Sioux City, LA, office.
      • My job during this period was to office train and field train new and veteran agents.
    • (p15) – Mr. Keating: I am still employed by the John Hancock …
      • I would like to know exactly, what guarantees do I have from this committee that I will not be harassed?
    • (p15) – Senator Metzenbaum. We cannot guarantee any position.
      • But I would guess that my colleague here from South Carolina and this Senator and I think every member of this Senate would be so outraged at John Hancock if they took any action against you for testifying before a Senate committee that they would find our wrath unlimited and that we would take every step possible to protect your position.
      • I think the Senator from South Carolina, with whom I disagree on some issues, but I think he would agree that no witness ought to ever be penalized for appearing before a Senate committee.
        • And this gentleman is asking whether or not-what guarantee does he have that he will not be terminated from his employment just by reason of his appearing here. Do I reflect the Senator’s view as well?
    • (p15) – Senator Thurmond. Yes, you do.
    • (p15) – Senator Metzenbaum. Thank you. Mr. Keating, please proceed.
    • (p16) – Mr. Keating: I began my career with John Hancock Mutual Life Insurance Co.in 1965.
      • From 1982 to June 12, 1990, I was the staff manager in the Sioux City, LA, office.
      • During the first years of my employment, everything that I heard from the John Hancock home office turned out to be true, correct, just like we were told.
    • Sometime in the early 1980’s, we began selling a product called variable life insurance.
      • Every day we received information on the home office computer with glowing account facts on how much these accounts were earning-25, 30, and 35 percent interest.
      • This information was shown to new prospects to get them to buy variable life insurance.
      • Also, these contracts required no premiums after 5 years.
      • We sold these variable life policies by the hundreds.
      • In fact, our Sioux City office was one of the leaders in the company.
    • (p17) – Several times the other people in our office and I went to meetings where we were told nothing about the risks involved in buying this product, just how much the insured would make.
    • I personally wrote two VLI contracts on Ivan Ammar in Randolf, NE.
      • He is the minister at the Lutheran Church there.
        • He bought these policies for his retirement.
      • The computer sheets showing the amount of his retirement benefits were fantastic.
      • He paid for years, but had to drop his policies when he found out he would have to continue paying premiums after retirement.
    • …another. Jeanette Keating, my wife, another. Holly Keating, my daughter, another. Jerry Eike, my son-in-law, another. Terry Eike, my daughter, another. Larry Eike, Jerry’s brother, another.
    • (p18) – The training we received was sales training only.
      • The home office people who came to the Sioux City, lA, office said: Don’t try to become a Ph.D. in variable life insurance; just learn enough to sell it and go.
      • This is what they told the whole office, and this was how I trained any new men that I hired:
        • Just sell it; do not worry about it.
      • Just before I got sick in 1990, the company seemed to change.
        • They started telling us about the risks.
    • This statement is only the tip of the problem.
      • There are hundred and hundreds more.
      • And, Senator Metzenbaum, I would like to tell you, sir, if you do not get the Government to do something about this, you haven’t seen nothing yet. 

Problem – Agent

  • I sincerely hope that we take a look at the agent and his role in this entire process.
  • Somehow I think we need to tie in the actuarial profession with various agents’ professional organizations, so that if the agent does in fact bastardize an illustration and make it completely unrealistic, he is liable too for discipline.

—  Neville S. Henderson

1991 – SOA – Illustrations, Society of Actuaries – 20p

  • Let’s go back to the question of understandability.
  • With no standardized format being utilized, many of the illustrations currently in use are far too complex for the average consumer or applicant to understand.
  • In many cases the selling agent does not understand what he is presenting, and this needs to be addressed.

—  Robert E. Wilcox, NAIC Chairman – Illustrations Working Group

1994 – SOA – Problems and Solutions for Product Illustrations, Society of Actuaries – 28p

  • I would say to all of you that if you think that you don’t have any customers or any agents who fail to understand what a nonguaranteed illustration really means, you’re kidding yourself.
    • And if you don’t think that you have customers out there (which means agents also) who believe that a vanishing premium illustration means that the policy becomes paid up in contractual terms, you’re kidding yourself.
    • We are going to learn by doing as we all go through this period of more and more unfulfilled policyowner expectations.

— Walter Miller , [Prudential]

1991 – SOA – Illustrations, Society of Actuaries – 20p

  • I think that one problem, even with the illustration disclosure, is that you are still not controlling what the agent actually says to the client, even when he or she sees that illustration. 
  •  I’ve been in many situations where our agent says, “I sold them a ten-pay contract and it was paid up in ten years,” and I say, “It’s not paid up.”
  • I don’t know how you can handle the idea of the agent telling somebody that it’s a paid-up contract when it really was a vanishing-premium-concept contract.

—  Susan Oberman Smith

1995 – SOA – Practical Illustrations and Nonforfeiture Values, Society of Actuaries – 14p

Problem – As Long as You Pay the Premium

  • Permanent (cash value) life insurance pays the beneficiary whenever the insured dies, as long as premiums have been paid. (p38)

2016 11 – FIO (Federal Insurance Office) – Report on Protection of Insurance Consumers and Access to Insurance – 58p

Life insurance is available in two basic types: term and permanent (which includes whole life, universal life, variable life, and variable universal life). 205  – ACLI 

  • After receiving these notices, John [Policyowner] contacted Glasgow [Agent] who had retired in 2000, to inquire why his policies would be terminating, even though he had timely paid the premiums on the policies for approximately 18 years.  (p4-5)

2010 – LC – Maloof v. John Hancock Life Ins. Co. –  60 So. 3d 263 – Alabama Supreme Court Opinion  —  [BonkNote]  —  39p  

  • Let’s review the basic mechanics of Universal Life.
  • The policy does not lapse if a premium is not paid;
    • rather, it lapses if the fund balance becomes too small to pay the next month’s cost of insurance. 

—  Ben H. Mitchell, [Bonk: a consulting actuary with Tillinghast in Atlanta – Years-?]

1981 – SOA – Universal Life (RSA81V7N412), Moderator: Samuel H. Turner, Society of Actuaries – 16p 

Cash Value Life Insurance – Confusing

  • Gary Sanders (National Association of Insurance and Financial Advisors-NAIFA) agreed that use of the term “cash value” was confusing.

2017 0217 – NAIC – LIBG WG Conference Call

  • (p66) – Statement James Collins (R-TX) – Much misunderstanding of cash value life insurance has been caused when people have overlooked the true function of cash value in the life insurance policy and have insisted on comparing it to “investments” and “savings”, whereas in fact cash values is primarily an incident of the reserve required by law to support the promise to pay at a later time, having its origin in the excess premiums charged in the early years of the contract to keep the premium level over the life of the policy.

1978 12 – GOV (House – Report) – Life Insurance Marketing and Cost Disclosure Report Together with Dissenting Views, John Moss (D-CA)  —  [BonkNote]

  • Traditional plans are fairly simple in their structure.
    • One can look at their premiums, their cash values and their dividends, if there happen to be any. 
  • Universal life presents something of a paradox. 

—  Ben H. Mitchell, [Bonk: a consulting actuary with Tillinghast in Atlanta – Years-?]

1981 – SOA – Universal Life (RSA81V7N412), Moderator: Samuel H. Turner, Society of Actuaries – 16p 

  • One would be, for example, term life insurance, I think you could totally deregulate…people understand term life insurance and so on.
  • You get into some of the cash value products, people are very confused.
  • They need help. —  They need information. —  It is a very difficult product.

—  J. Robert Hunter, Director of Insurance, Consumer Federation of America

2004 0331 – GOV (House) – Working with State Regulators to Increase Insurance Choices for Consumers – (PDF-205p,

  • There should be suitability rules in place, particularly for cash value life insurance policies to assure that sales of proper products are made.  (p14)

— J. Robert Hunter

2003 0506 – GOV (House) – Increasing the Effectiveness of State Consumer Protection – [PDF-123p

  • The lack of understanding of cash value products was evidenced by the fact that the majority of people could not understand why, in Chart A, if you continue to pay your premium, the benefit would run out before age 95…  (p467)

1990-1A, NAIC Proceedings – NAIC / LIMRA – Universal Life Disclosure Form Focus Group Summary  —   [BonkNote]  —  10p

  • Unlike a term policy, which can end after a specified number of years, permanent life insurance will continue to the policy’s maturity age so long as premiums are paid.

(Note that this isn’t exactly accurate for UL, where policies can continue as long as the cash value is sufficient to pay the policy charges. We may want to make that distinction.) 

2017 1115 – ACLI Letter, NAIC LIBGWG – 12p

  • A great deal of the confusion seems to stem from a lack of understanding of how cash value insurance products work and a lack of understanding of insurance terminology.
  • Also, because most people presume that if you pay your premium continuously, your policy will remain in effect, quite a few people had a hard time understanding how or why the policy would terminate in policy year 31.
    • This was simply foreign to their way of thinking.
  • One person was so confused that he said that the maturity age and endowment benefit were moot points, since the policy was going to end at year 31 anyway.

1990-1A, NAIC Proceedings – NAIC / LIMRA – Universal Life Disclosure Form Focus Group Summary  —   [BonkNote]  —  10p

  • Why can’t I compare cash value products and have some sense of what is going on in the marketplace?
  • Because the notion-I mean, it really is a problem, and it is a problem that is underaddressed because everyone is so focused on solvency that they forget all these other important regulatory issues. (p26)

—  Daniel Schwarcz, Associate Professor, University of Minnesota Law Schoo

2011 0914 – GOV (Senate-Banking/SII) – Emerging Issues in Insurance Regulation, Jack Reed (D-RI)  —  [BonkNote]

Problems – Language

  • The “unbundling’ of services and other product differences between Universal Life and Ordinary Life cause current literature to be inapplicable, as well as insufficient, for Universal Life.

1984 Journal – American Academy of Actuaries

  • I then said, “No, read the agreement. We’re not going to ask for that kind of thing.”
  • I was prepared to say, although I couldn’t commit us to this, that anything that was used up we never would ask them to pay for.
  • Later we had a terrific argument over the difference between “used up” and “used.”
  • They translated the agreement into Russian using the word that we would have called “used,” that is, not new.
  • So, when we got into negotiations with them and said that they must return some things which were not “used up,” they thought we were using the word “used.”
  • Therefore, they said, “Well, these have been used.“

It wasn’t until [Charles] Bohlen was in negotiations, and heard the Russian word that he turned to our side and said, “You know, you’re not using the same word.”

  • Then he got the agreement out and found that the translation was wrong.
  • The word “used” was in there instead of “used up.
    •  “Consumed” was our word; “lost, consumed or destroyed.”
    • “Consumed” was translated to them as “used.”

This was one of the minor stumbling points of the negotiations that caused a long delay.

— Oral History Interview with Michael H. Cardozo

Washington, D.C., May 29, 1975 – by Richard D. McKinzie

https://www.trumanlibrary.gov/library/oral-histories/cardozom

Problem – Policyholder Expectations

  • The most obvious is if we fail policyholder expectations, we may have policyholder suits.

— Larry R. Robinson, Chairman of the ACLI Subcommittee on Cost Comparisons

1988 – SOA – Actuarial Opinion on Non-Guaranteed Elements, Society of Actuaries – 12p

Blumenthal v New York Life – Deposition – Pay Premium

What I noticed was there is a requirement for in-force illustrations, and people may have thought they bought one thing and whenever you have to give them an in-force illustration with a current disciplined scale, they’re going to realize they bought something else.

I think many companies will have serious problems with policyholder retention.

  —  Mark J. Greene, FSA. MAAA, Supervising Actuary, New York State Insurance Department

1995 – SOA – Practical Illustrations and Nonforfeiture Values, Society of Actuaries – 14p

Problems – Index

Liquidity – Policy Loans

  • [ACLI] – Re: Policy Loan Developments of 15 Life Insurance Companies
  • The purpose of the meeting was to discuss concerns about the liquidity conditions and the possibilities of future adverse developments.
  • The company people wanted to be sure that Mr. Volcker was fully aware of the potentials of the situation and to arrange a liaison between his staff and the staff of the Council and this aim was accomplished.
  • In the meantime, we have begun to explore the means by which the resources of the business might be applied to alleviate any temporary extreme liquidity problems that might arise for a particular member company.
  • [Bonk: Paul Volcker = Chairman of the Federal Reserve]

1980-2, NAIC Proceedings

  • For example, the survey of 15 insurers conducted by the Council shows that during the first 4 months of 1981, gross loans made averaged slightly more than $600 million per month, somewhat less than the same period in 1980 but substantially higher than the same period in 1979.
    • These periodic spurts of borrowing have caused serious problems for life insurers, their policyholders and the economy.
    • Enactment of the model bill by the states should alleviate these problems in the future.

1981-2, NAIC Proceedings

  • Joseph BELTH: Before you sit down, John, let me ask you a question.
    • Rumor has it that there were some extensive discussions between highly placed life insurance officials and officials of the Federal Reserve in April, 1980.
    • Would you care to discuss exactly what the nature of those conversations was?
  • MR. BOOTH, ACLI : I was not present.
    • There were some discussions; as you know, in the Spring there was a policy loan crunch.
    • There have been discussions held periodically as far back as 15 to 20 years.
  • MR. BELTH: I raise the question whether the disintermediatlon problem could conceivably become so serious as to threaten the viability of the life insurance industry and force some kind of unilateral governmental action in order to save, or literally bail out, the industry.
    • One incident that I recall which somehow has been blacked out of most textbooks was when the NAIC (it was then the NCIC) allowed life insurance companies to change their valuation rules for just one year.
    • Was it 1932?

1981 – SOA – The Life Insurance Business–The View of Consumerists, Society of Actuaries (rsa81v7n38) – Daniel F. Case – Moderator – 18p

  • [Bonk:  Is Joseph Belth Referencing ->???]
  • Further Resolved, That inasmuch as a number of worthy industrial and commercial corporations are in emergency receivership and a number of corporate bonds are in default as to interest and/or principal by reason of lack of liquidity rather than by reason of lack of underlying value, stocks of corporations in receivership and bonds in default should be valued on the 1931 Convention basis less 30 per cent of the difference between such Convention value and the exchange quotation as of December 1, 1932, unless the value underlying such securities has been heavily depleted or has disappeared to such an extent that a lower value is required by reason of such special circumstances. (p8)
  • The Committee on Valuation of Securities

1933-1 volume only, NAIC/ NCIC

As long as you pay the premium….

  • Unlike term insurance, all permanent policies remain in place as long as the premium is paid.

NAIC – insureuonline.org/insureu_type_life.htm – <Bad Link>

  • After receiving these notices, John contacted Glasgow who had retired in 2000, to inquire why his policies would be terminating, even though he had timely paid the premiums on the policies for approximately 18 years.  (p4-5)

2010 – LC – Maloof v. John Hancock – Alabama Supreme Court Opinion – 39p

  • Let’s review the basic mechanics of Universal Life.
  • The policy does not lapse if a premium is not paid; rather, it lapses if the fund balance becomes too small to pay the next month’s cost of insurance. 

—  Ben H. Mitchell, [Bonk: a consulting actuary with Tillinghast in Atlanta – Years-?]

1981 – SOA – Universal Life (RSA81V7N412), Society of Actuaries – 16p

  • The complications begin with a very simple question:
  • What’s the premium for Universal Life?
    • It could be almost anything.
  • Then what’s the cash value?
    • That depends on the premium.
  • It is the relationship between the premium and cash value that determines the product characteristics of Universal Life.

—  Ben H. Mitchell, [Bonk: a consulting actuary with Tillinghast in Atlanta – Years-?]

1981 – SOA – Universal Life, Society of Actuaries – 16p

  •  ….the concept of a “premium due date” was thought to be inapposite to flexible premium policies.

1983-1, NAIC proceedings

[def. inapposite: out of place; inappropriate]

  • A great deal of the confusion seems to stem from a lack of understanding of how cash value insurance products work and a lack of understanding of insurance terminology.
  • Also, because most people presume that if you pay your premium continuously, your policy will remain in effect, quite a few people had a hard time understanding how or why the policy would terminate in policy year 31.
    • This was simply foreign to their way of thinking.
  • One person was so confused that he said that the maturity age and endowment benefit were moot points, since the policy was going to end at year 31 anyway.

1990-1A, NAIC Proceedings – NAIC / LIMRA – Universal Life Disclosure Form Focus Group Summary  —   [BonkNote]  —  10p

  • Life insurance is available in two basic types:
    1. term and
    2. permanent (which includes whole life, universal life, variable life, and variable universal life). 205
  • Permanent (cash value) life insurance pays the beneficiary whenever the insured dies, as long as premiums have been paid. (p38)

2016 11 – FIO (Federal Insurance Office) – Report on Protection of Insurance Consumers and Access to Insurance – 58p

Life insurance is available in two basic types: term and permanent (which includes whole life, universal life, variable life, and variable universal life). 205  – ACLI 

  • Q – Defense Attorney (Phillip E. Stano, Sutherland, Asbill & Brennan): The next sentence, quote, this can happen due to insufficient premium payments if loans or withdrawals are made or if current interest rates or charges fluctuate. So the illustration gives three reasons by which the cash value might be insufficient. Let me repeat those. One is insufficient —
  • A – Blumenthal (Policyowner – Plaintiff):  You don’t need to.
  • Q – You understand that?
  • A – Yeah. Jesus.
  • Q – Okay.
  • A – Get to the point that you’re trying to establish.  Jesus, this is ridiculous.
  • Q – You —
  • A – This has nothing to do — I know I was paying the premium. That’s all I know, period. That’s it.
  • Q – So–
  • A – We paid every month whatever it was.
  • Q – So the three reasons that are given in the illustration that the cash surrender value can be insufficient, you understand those three reasons that I just mentioned?

2011 – LC – Blumenthal v. New York Life –  2010 0302 – 85-1 and 85-7 – Exh 1 and 6 – Deposition of Irving Blumenthal – 61p

  • [re: Vanishing Premium]
  • I think any way that we can make illustrations more understandable to the public is certainly going to help us.
    • We’ve seen the problems that have occurred when Senator Howard Metzenbaum (OH-D) was given an illustration with a vanishing premium, and he had absolutely no idea that he had bought a policy that was not paid up in four years.
    • It caused many problems for the industry; it caused many problems because the press got involved, and the press doesn’t understand the products as well as it thinks it does.

—  Linda M. Lankowski

1995 – SOA – Practical Illustrations and Nonforfeiture Values, Society of Actuaries – 14p

  • Universal life insurance, like whole life insurance, is a type of permanent life insurance policy that accumulates tax- deferred cash value.
  • The policy stays in effect for as long as you remain alive and pay the premiums.

usnews.com/360-reviews/life-insurance/universal-life-insurance

  • Life insurance pays a death benefit if you die while the policy is in effect, in exchange for premiums you pay before your death.

2018 – NAIC Life Insurance Buyer’s Guide – 8p

  • g. Clarifying “Coverage Period Description”
  • The Working Group discussed what information is intended to be included.
  • Mr. Yanacheak said this is intended to capture how long a policy’s term is-a term of years or for life.
  • Mr. Birnbaum said it is intended to answer the question: If I pay my premium, this policy will cover x amount of time.
  • Mr. Wicka suggested, and the Working Group agreed, to the following revised language to Section 5A(2)(e)(iii): (iii) Indicate whether it is a term or permanent policy.
    • If it is a term policy, indicate the length of the initial term.

2019 0917 – NAIC (LIIIWG) – Life Insurance Illustration Issues (A) Working Group Conference Call  —  [BonkNote]

  • Whole (or universal) life insurance policies are considered permanent.
  • As long as you pay the premium, the policy is in effect.  (p32)

2015 Version – Consumer Action Handbook, published by USAGov, part of the U.S. General Services Administration’s (GSA) Office of Citizen Services and Innovative Technologies – 146p 

  • The most popular document distributed by Pueblo remains the annual Consumer Action Handbook, a free trouble-shooting guide to help Americans solve all sorts of consumer problems.

govbooktalk.gpo.gov/tag/free-government-books/

  • 2013 0905 – LC – Johnston & Johnston v Conseco – 5th Circuit Court of Appeals – 13-30010 —   [BonkNote]
    • 2013 0905 – LC – Johnston & Johnston v Conseco – 5th Circuit Court of Appeals – 13-30010 – Oral Argument – mp3  —  [BonkNote] —  [link-mp3-audio]
      • 20 –  Judge Carl E. Stewart  …..usually the Policy Due Date is not a mystery. 
  • Term insurance is for a specific period of time whereas permanent is for life as long as the premiums are paid.

MassMutual – massmutual.com/insurance/life-insurance

  • The personalized information in the Policy Overview is the premium for the policy – based on information known to the producer or insurer at the time and subject to change based on additional or revised information – and that information can be provided prior to purchase.
  • If an insurer can produce an illustration for a complex, investment type life insurance product prior to the consumer purchase, it is clearly possible for an insurer to provide the premium for a policy prior to purchase.

2019 0830 – Letter – CEJ / Birney Birnbaum to NAIC (LIIIWG) Life Insurance Illustrations Issues Working Group – 12p

  • Since universal life insurance was then being marketed only on a very limited basis, the council task force’s proposals did not address this product.
    • The council has now developed a recommendation for universal life insurance, which we would like to present for your consideration.
  • The essence of the proposal is that universal life insurance be treated for cost disclosure purposes as a life insurance plan with a nonguaranteed cost element.
  • Thus, the policy summary would show for the prescribed policy years the anticipated premiums and, both on the guaranteed and currently illustrated bases, the death benefits, cash surrender values, and endowment amounts, if any.
    • The life insurance cost indexes would be calculated on the currently illustrated basis, using the anticipated premiums, and would be required to be shown along with corresponding nonguaranteed elements.
  • An additional item of information that is recommended to be required in the policy summary is the point at which the policy will expire based on the policy guarantees and the anticipated premiums shown in the summary.

—   1982-1, NAIC Proceedings – 1981 1215 – Letter – ACLI to NAIC – Cost Disclosure for Universal Life, by the Special Task Force of the ACLI Cost Disclosure Subcommittee to NAIC Task Force on Life Insurance Cost Disclosure – 4p