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This NYT article†http://www.nytimes.com/2016/08/14/business/why-some-life-insuran... describes the latest scam by insurance companies to drain policies of built up cash values †and then raising rates on all such policies claiming there are insufficient funds to pay benefits.

The strategy seems to have been pioneered by European Insurance companies that have gained control of US insurance companies:

1. Convince state regulators that the policies are overfunded. They do this by moving liabilities for future payouts to off-balance-sheet companies that are not subject to state regulation.
2.†For some reason state regulators sign off on this and authorize excess funds to be paid out to insurance company shareholders (the European parent company) as an extra-ordinary dividends, in some cases over $2 billion.
3. Some time later convince state regulators that the policies are now underfunded†because the off-balance-sheet companies defaulted and that policy premiums need to be raised by 200-300%.
4. State regulators approve the 200-300% premium increases.
5. Policyholders file class-action lawsuits but have trouble prevailing since state regulators signed off at each stage that the actions of the insurance company were fiscally sound and hence any subsequent premium increase could not have been anticipated.

Note that this scam can only happen with life insurance and LTC policies that build up future benefits using some kind of cash accumulation. Straight insurance or term life insurance policyholders cannot be scammed in this way since there is no cash accumulation going on.

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I don't think you understand how insurance is currently regulated, generally by a state insurance commissioner, who is o... (more)

tuphat (Aug. 15, 2016 @ 2:24p) |

Someone tell the John Oliver show about this...

cjchaps (Aug. 15, 2016 @ 2:38p) |

I agree !

FWjunkie2 (Aug. 17, 2016 @ 3:18p) |

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I read this yesterday. I'm glad that I stuck with term.

BTW - OP - thank you for posting a thoughtful summary/analysis of the article rather than just posting the link!

Hopefully this gets more coverage otherwise there is no reason for insurance companies to change their ways.

In my view, it just shows how the companies have no skin in the game. They build policies which include hefty profit for them. It those assumptions are correct then they win. If those assumptions are wrong, well you lose bc of issues like this or insolvency.

The area that bothers me the most are increasing cost of insurance especially on old in force ULs that have decent guaranteed interest rates. What good is a guaranteed interest rate if they are allowed to charge you more some place else just bc of it.

But it isnt accurate to say term cant get into the same trouble. It can. If they dont have the money to pay the death benefits then you are in a similar situation. Id say its less of an issue since term is so much cheaper and few are expecting to obtain a death benefit from a term policy.

if they are pulling this stunt with LTC and UL, Im sure they are probably doing something just as shady with annuities.† Sure they cant adjust payouts, but if they are underfunding reserves, they can pull some shady fund movement and dummy corporations to sheild assets and then claim they cannot make annuity payments and claim bankruptcy in the dummy corp while protecting the larger organization.† Unlimke Cd's, Annuties are not fdic insured.† They are backed by the company so if they fold, you lose.

With annuities the first "tactic" seems to be to do things with VA with income riders. What they have done is gotten rid of some of the more profitable investments within the VA (as in good for the client profitable). They sent people notice they had to change their investment or lose their income rider even though they have been paying for that rider for years and the rider is very expensive. It supposedly wasnt written into the contract that they cant play these type of games and thus so far they have gotten away with it.

ananthar said:   state regulators signed off at each stage that the actions of the insurance company were fiscally sound ..
† I wonder what a look into the campaign donations will reveal...

Any LTC/ Life companies NOT doing this?

Great article. What stops them pulling the same trick with term life? I have mine with Bannar. Just wondering if it is worth to carry any life insurance if the providers are so bad?

Nobody can answer that question but if the day comes where multiple death benefits aren't paid especially below guarantty assoc limits then faith in the industry will probably vanish. I'd keep term regardless of this development for sure. It just isn't that costly and you weren't expecting a payout anyway so this information just isn't enough to jump ship.

Good as argument as any that insurance companies need to be regulated at the federal level. †Less opportunity for shenanigans.

tuphat said:   Good as argument as any that insurance companies need to be regulated at the federal level. †Less opportunity for shenanigans.
† You don't think federal politicians can be bought in the same manner as state politicians??†

examiner44 said:   
tuphat said:   Good as argument as any that insurance companies need to be regulated at the federal level. †Less opportunity for shenanigans.
† You don't think federal politicians can be bought in the same manner as state politicians??†

† The bigger question how will the buffoons in congress screw up the system so the lobbyists can pay them to tell them how to fix it.

The same reasoning as yours justified the quasi-government organizations of Freddie Mac and Fannie Mae as mortgage clearing centers of the real estate industry... do you recall 2008?† Better yet do you or any recalled the concerns when Freddie Mac extended it's "involvement" in real estate in 1970?

Is there a way to look up policies online from NY + PA, like unclaimed money sites?

how would this play in with mutuals? Aren't policy holders theoretically the owners and dividends go back to them? Kind of like a credit union?

I'm no expert in this area, only have term policies myself.

In this low interest environment mutuals are also looking at investments they didn't need to look at in the past.

You will notice mutuals Do Not have cheaper term so one shouldn't think the mutual dynamic guarantees better results.

dhodson said:   In this low interest environment mutuals are also looking at investments they didn't need to look at in the past.

You will notice mutuals Do Not have cheaper term so one shouldn't think the mutual dynamic guarantees better results.



I don't disagree...however it seemed the crux of this sceme seemed to be insurers transferring funds to pay out dividends to stock holders....that would not be an issue with a mutual, right?

rascott said:   how would this play in with mutuals? Aren't policy holders theoretically the owners and dividends go back to them? Kind of like a credit union?

I'm no expert in this area, only have term policies myself.

You are indeed protected with mutuals, unless they decide to demutualize, with the approval of current policyholders. Unfortunately de-mutualization is very profitable for management which typically become the largest shareholders of the new for profit company (policyholders typically get a small number of shares each) so they find ways to convince shareholders to vote for demutualization. Next management does a leveraged buyout of the small shareholders (policy holders) and then starts behaving like any other for-profit insurance company.

examiner44 said:   
tuphat said:   Good as argument as any that insurance companies need to be regulated at the federal level. †Less opportunity for shenanigans.
† You don't think federal politicians can be bought in the same manner as state politicians??†

† Yes, federal politicians can be bought in the same manner as state politicians - but state politicians are much, much cheaper. †The key to success for ALEC.
Also, insurance companies are primarily regulated at the state level, so buying federal politicians isn't much help.††

Although I share the ire of people here at insurance companies; I have to ask: did you read the entire NYT article?

OP gave a very good summary of the second part (and major second argument) of the article - financial manipulations of insurance industries, but he and other poster had completely ignored the first part and first argument: insane, unprecedented and prolonged manipulation of interest rates by central banks.

This is classic of the law of unintended consequences: near-zero interest rates will metastasize in different segments of the world's economy and will cause crisis much worse than overrated "Great Recession" (did people went hungry and stopped buying iPhones?)† which it supposed to "fix"; insurance's industry financial models are broken over this.

This is very sad the elderly are being hit with this, but they're being hit tenfold with zero interest rates: anyone working at and frequenting banks can attest of the tragedies of elders unable to maintain any guaranteed interest income; elder's financial are broken much more than insurer's and they can't weasel out of this.

dhodson said:   In this low interest environment mutuals are also looking at investments they didn't need to look at in the past.

You will notice mutuals Do Not have cheaper term so one shouldn't think the mutual dynamic guarantees better results.

† Translating the first sentence, the insurers are taking on more risk to get the returns they need.

neophyte said:   Although I share the ire of people here at insurance companies; I have to ask: did you read the entire NYT article?

This is classic of the law of unintended consequences: near-zero interest rates will metastasize in different segments of the world's economy and will cause crisis much worse than overrated "Great Recession" (did people went hungry and stopped buying iPhones?)† which it supposed to "fix"; insurance's industry financial models are broken over this.

††
There is some truth in the unintended consequences of zirp.† If the companies hadn't been moving the liabilities to off-balance sheet vehicles, one could blame it primarily as a result of zirp.† However, if the companies hadn't essentially raided the funds to show more profit to shareholders, this wouldn't have been such an issue.† Personally I think what lead up to the financial crisis, greed, greed, and more F* greed in our financial institutions, run by those from the so called elite universities has only gotten worse with an attitude of screw everyone as much as possible.† There is no sense of decency or doing what is "right" in these financial institutions.

stanolshefski said:   dhodson said:   In this low interest environment mutuals are also looking at investments they didn't need to look at in the past.

You will notice mutuals Do Not have cheaper term so one shouldn't think the mutual dynamic guarantees better results.

† Translating the first sentence, the insurers are taking on more risk to get the returns they need.


Correct but with that comes more risk. Agents will pretend these products have better risk adjusted returns. That just isn't the case. Risks are related directly to underlying investments and assumptions made by insurance company. No magic.

ananthar said:   rascott said:   how would this play in with mutuals? Aren't policy holders theoretically the owners and dividends go back to them? Kind of like a credit union?

I'm no expert in this area, only have term policies myself.

You are indeed protected with mutuals, unless they decide to demutualize, with the approval of current policyholders. Unfortunately de-mutualization is very profitable for management which typically become the largest shareholders of the new for profit company (policyholders typically get a small number of shares each) so they find ways to convince shareholders to vote for demutualization. Next management does a leveraged buyout of the small shareholders (policy holders) and then starts behaving like any other for-profit insurance company.


How common is this? I mean many of the larger mutuals have been around since the 1800s.

Also, it seems that most of these problems came from these policies that offered guaranteed xx% returns, no? The article mentioned that these policies haven't been sold for years, and now returns are somehow tied into stock market performance.

rascott said:   
ananthar said:   
rascott said:   how would this play in with mutuals? Aren't policy holders theoretically the owners and dividends go back to them? Kind of like a credit union?

I'm no expert in this area, only have term policies myself.

You are indeed protected with mutuals, unless they decide to demutualize, with the approval of current policyholders. Unfortunately de-mutualization is very profitable for management which typically become the largest shareholders of the new for profit company (policyholders typically get a small number of shares each) so they find ways to convince shareholders to vote for demutualization. Next management does a leveraged buyout of the small shareholders (policy holders) and then starts behaving like any other for-profit insurance company.


How common is this? I mean many of the larger mutuals have been around since the 1800s.

Also, it seems that most of these problems came from these policies that offered guaranteed xx% returns, no? The article mentioned that these policies haven't been sold for years, and now returns are somehow tied into stock market performance.

††http://www.glenndaily.com/mhctable.htm

ananthar said:   This NYT article†http://www.nytimes.com/2016/08/14/business/why-some-life-insuran...†describes the latest scam by insurance companies to drain policies of built up cash values †and then raising rates on all such policies claiming there are insufficient funds to pay benefits.

The strategy seems to have been pioneered by European Insurance companies that have gained control of US insurance companies:

1. Convince state regulators that the policies are overfunded. They do this by moving liabilities for future payouts to off-balance-sheet companies that are not subject to state regulation.
2.†For some reason state regulators sign off on this and authorize excess funds to be paid out to insurance company shareholders (the European parent company) as an extra-ordinary dividends, in some cases over $2 billion.
3. Some time later convince state regulators that the policies are now underfunded†because the off-balance-sheet companies defaulted and that policy premiums need to be raised by 200-300%.
4. State regulators approve the 200-300% premium increases.
5. Policyholders file class-action lawsuits but have trouble prevailing since state regulators signed off at each stage that the actions of the insurance company were fiscally sound and hence any subsequent premium increase could not have been anticipated.

Note that this scam can only happen with life insurance and LTC policies that build up future benefits using some kind of cash accumulation. Straight insurance or term life insurance policyholders cannot be scammed in this way since there is no cash accumulation going on.

††
Thanks for sharing OP! †I've been on the fence with WL, but this pretty much convinced me to keep separating insurance separate from savings (Term coupled with investment accounts).

ssgcinty said:   
ananthar said:   state regulators signed off at each stage that the actions of the insurance company were fiscally sound ..
† I wonder what a look into the campaign donations will reveal...

This is yet another reason we need to get money out of politics and have some sensible campaign finance reform.

examiner44 said:   
tuphat said:   Good as argument as any that insurance companies need to be regulated at the federal level. †Less opportunity for shenanigans.
† You don't think federal politicians can be bought in the same manner as state politicians??†

† I don't think you understand how insurance is currently regulated, generally by a state insurance commissioner, who is often an elected official. †The staffs of such agencies are very small, compared to the federal banking regulatory apparatus, and are very much prone to jurisdiction-shopping, i.e., ins. co. threatens to move to a different state.

"Insurance in the U.S. is a big deal thatís regulated like a small deal. Insurance premiums paid each year equal about 7 percent of the U.S. gross domestic product, and companies such as American International Group and Prudential Financial rank among the biggest financial institutions in the country. Yet oversight of them and other insurers is fragmented among 50 states. Instead of a well-financed Federal Deposit Insurance Corp., policyholders of insurance companies that fail have no safety net except 50†state guaranty associations." †More at: †http://www.bloomberg.com/news/articles/2014-07-31/insurers-are-r...

Someone tell the John Oliver show about this...

†††
Thanks for sharing OP! †I've been on the fence with WL, but this pretty much convinced me to keep separating insurance separate from savings (Term coupled with investment accounts).

† I agree !



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