Some Insurance Policies Are Best Left Unbought

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. If the loss ratio is under 60 percent, Mr. Brobeck says, that should be an automatic red flag. Yet, most of these policies pay out 40 percent, and in some cases, 20 percent. The insurer is keeping the rest.

"While, in theory, the policies could be useful to a particular individual, in reality they are not. And they are almost all overpriced," he says.

Examples of these types of policies:

Credit-card insurance. These policies say they will protect your credit cards against losses sustained if they are stolen or illegally used. But most credit cards have limits on liability if the company is quickly notified that the card is missing.

Credit-life/credit-disability policies. These pay off the outstanding balance on a loan if you die, and pay off parts of a loan if you are incapacitated. "If a loan comes with some kind of a credit-life policy, the loan writer is probably making a commission on the policy," Hunter says.

Dental insurance. These policies pay for teeth-cleaning or for minor dental work. But you will usually be limited to a preselected group of dentists.

Hospital indemnity insurance. These policies typically promise daily payments of between $75 and $100 for a hospital stay. But even one day in a hospital can cost thousands of dollars.

"Dread insurance." Paid if a person is diagnosed with a specific type of illness, the insurance company is banking on the fact that most of its customers will not face a particular malady.

Extended warranties on appliances. These policies pay off the cost of an appliance, or defray repair costs, if the product breaks down. But manufacturer warranties usually cover three months to a year.

One area where rates have come down is credit-life insurance. Between 1990 and mid-1994, 18 states lowered credit-life rates, according to the CFA.

Instead of buying a lot of small-claims policies, which can quickly add up to large cumulative monthly payments, a person should instead buy a "comprehensive policy" that covers as many health/liability/disability contingencies as possible, Hunter says. A person needs insurance that meets the biggest possible dollar losses, not little losses that most people could probably meet out of savings, he says. These larger policies can be purchased through the direct-marketing divisions of national insurance firms, or through local insurance brokers found in the yellow pages.

If a person does find it necessary to buy a small-claims policy, he or she should seek a firm with a payout ratio of over 60 percent and a safety rating of "A" from a national rating agency such as A. M. Best and Standard and Poor's, experts say.