Some Insurance Policies Are Best Left Unbought Don't Insure Credit Cards, Loans, or Appliances, Experts Say

By Guy Halverson, writer of The Christian Science Monitor | The Christian Science Monitor, July 16, 1996 | Go to article overview

Some Insurance Policies Are Best Left Unbought Don't Insure Credit Cards, Loans, or Appliances, Experts Say


Guy Halverson, writer of The Christian Science Monitor, The Christian Science Monitor


Within the space of a week, one northern New Jersey businessman recently got "invitations" from five different companies offering dental, health, accident, disability, and credit-card insurance. The brightly colored, glossy brochures promised unique benefits at "low cost."

Yet, according to a number of consumer specialists dealing in insurance, such policies typically benefit the insurance company more than the consumer. The rule of thumb on small-claims insurance policies - which usually means the type that comes to you unsolicited through the mail - is "beware," says Robert Hunter, an insurance specialist at the Consumer Federation of America (CFA), a public-interest group in Washington.

"When you buy insurance, you should be 'on the make,' " Mr. Hunter says. In other words, he says, "you should be actively seeking out competing companies, to find the most comprehensive, low-cost insurance that matches your individual needs. If the company comes to you 'on the make,' the policy probably isn't worth much," in terms of providing sound benefits at low costs.

For millions of consumers, finding cost-efficient and reputable insurance is far from easy. That's underscored by news reports this past week about one of the best-known US insurance companies. Prudential Insurance Company of North America, the nation's largest life insurer, agreed to pay a record $35.4 million in fines and establish a $100 million restitution program. According to the findings of a task force from regulators in 30 states, Prudential engaged in widespread "twisting" - that is, selling unnecessary policies, often by having the client borrow against established policies. Top executives of Prudential apologized for the incidents, which occurred before the current management team came to office in 1994.

Prudential is not alone in finding itself targeted by regulators. In the early 1990s, the giant Metropolitan Life Insurance Company paid up to $96 million in fines and refunds after a multistate task force found the company had improperly marketed life insurance policies as retirement/savings plans.

Companies such as Prudential and Metropolitan represent the cream of the insurance industry. Yet, the small-claims policies - the type that come through the mail or are used to pay off loans - are often issued by smaller companies. Many of these firms are heavy advertisers in magazines and newspapers.

Small-claims policies "are consistently the most-expensive of all types of insurance," says Stephen Brobeck, executive director of the CFA. "It's a {relatively small} niche market for insurers that cannot take advantage of economies of scale and which they often seek to exploit. And it results in almost invariably high prices."

How do you know if you're being bilked?

Ask the company for its "loss ratio," an industry term for the amount an insurer pays out in claims as a percentage of what it receives in premiums. …

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