As described more fully at the end of this monograph, CFA has a long and successful history of protecting consumers and reforming the insurance marketplace through public education, consumer assistance programs and advocacy. Through its work, CFA has saved consumers billions of dollars, led the reform of insurance laws and regulations nationwide, and its insurance research is often recognized and cited by the media and policymakers.

Protecting Consumers of Important but Complicated and Sometimes Deceptive Life Insurance and Related Financial Planning Products

Life insurance and annuities can play a valuable role in the financial planning of American families by providing them with additional resources after the retirement or death of a breadwinner. But the various products sold in this space do not always meet a standard of fairness or reasonableness that should be expected of a financial safeguard.

CFA focuses on two overarching areas of effort needed to reform life insurance markets, practices, and oversight so consumers do not waste billions of dollars on excessively priced insurance, on products that are unsuitable for them, or on deceptive and fraudulent products.

Below, we discuss current and projected projects in each of these two areas of effort – consumer education and advocacy for improved law and regulation.

Where large insurers compete for business with high quality, reasonably priced options, the focus of effort should be educational in nature so consumers can make informed purchase decisions. However, large insurers do not consistently offer high quality life insurance products to low-and moderate-income (“LMI”) Americans and people of color. Ford Foundation-funded research CFA undertook in 2011 revealed some of the problems these communities face, including families being underinsured with respect to life insurance protection, overcharged relative to the coverage provided, and often sold questionable life insurance and derivative products that waste limited resources and offer little protection. For these problems and abuses educational efforts alone are not enough; regulatory and legislative action are needed. In fact, even the more competitive segments of the life insurance market exhibit some conflicts of interest and anti-consumer practices that also deserve consumer advocacy in support of legislative and regulatory reform, especially related to creating and enforcing suitability standards for products.

Sustaining and Expanding CFA’s Life Insurance Education Work

 Life insurance products range from very simple (term insurance) to very complex and opaque cash value products (like whole life, universal life, variable universal life, and annuities).

Simple term life insurance satisfies the most straightforward need associated with life insurance – providing for vulnerable dependents in the event of a premature death. This is a pretty healthy market, and it is fairly easy to compare prices of term insurance. Web-based services are generally informative and competition for customers provides many options for consumers to shop around.

Cash value life insurance and annuity products are, on the other hand, extremely difficult to understand and to know when a product is best for the buyer. This is because these products incorporate a banking or investment element into the policy. It is very hard to determine just how much of the premium dollar is paying for the insurance, how much is paying for agent commissions and other expenses, and how much goes into your internal bank or investment account. It is also hard to assess the quality of these products. In fact, CFA’s life insurance actuary – a former State Insurance Commissioner – argues that consumers need to conduct a sophisticated analysis of the policy to determine if a particular policy is appropriate for that person.

A low-cost service CFA has run for years, called “CFA’s Rate of Return (ROR) Service,” uses a specialized program, our life insurance actuary estimates a policyholder’s investment returns on any cash value life insurance policy — whole life, universal life or variable life. Each program participant receives a document showing average annual RORs if they hold the policy for 5, 10, 15, and 20 years. The consumer also gets a four-page explanation that includes other valuable information relevant to buying or owning cash value life insurance. While this is invaluable information for a policyholder, due to resource constraints, CFA can only provide this service to very few customers today. But, as resources become available, CFA intends to expand access to the ROR Service through innovative outreach and marketing efforts. Consumers could submit information and policy documents to CFA and our staff expert would provide them with an analysis of their coverage and options for them as they consider what to do with the policy.

Educational Resources and Tools CFA Plans to Develop or Expand

1. Life Insurance Buyers’ Guide. CFA plans to research, write, design, and publish a consumer-facing buyers’ guide to the various insurance-financial products with death benefits. The guide will include information on the various types of cash-value insurance products including life insurance, funeral insurance, annuities, and credit life insurance. Once all of our research and information is placed in a single guide for distribution, we will issue updated editions to capture new laws, new trends, and new warnings for insurance consumers in the 50 states.
2. Annuities Buyers’ Guide. Annuities’ promise of guaranteed income for life is an attractive one for many investors, particularly those approaching retirement. That appeal only intensifies in the wake of market disruptions like the pandemic-related stock market oscillations of 2020. But annuity products offered by life insurers are among the most complex and opaque investment products sold to retail investors, with costs and risks that are often poorly understood by non-experts. With conflicts of interest rampant in the sale of annuities, consumers are too often encouraged to purchase the products that reward the seller most, rather than those that represent the best value for the

Currently, much of the information that is available to consumers about annuities comes from the industry and reflects a pro-annuities bias. Even consumer education materials developed by state insurance regulators are of minimal value. Dense with technical jargon, those materials do little to alert potential investors to the costs and risks associated with some of the most commonly sold types of annuities. They do even less to help consumers distinguish between individual annuity products based on factors related to cost and quality. Rather than relying on industry-sponsored information, our research will produce independent, user-friendly educational materials to help consumers determine whether an annuity is a good option for them, what type of annuity would best suit their needs, and which annuities within that product category represent the best value.

Building the Go-To Website for Evaluating Life Insurance Products. A website to grade the life insurance products on the market, independent of insurance company funding, commissions or kickbacks, is necessary to further help consumers and impact the marketplace. CFA has plans to expand its web presence with a go-to website for consumers who are shopping for life insurance or trying to ensure they are getting what they are due from a policy.  As resources become available, “The Only Truly Independent Universal Life Insurance Calculator” is being developed for the site. Once developed, this calculator will allow consumers to plug in data about themselves and their insurance needs, and our calculator will provide an estimate of what a fair policy should cost in the market based on the most currently available information. This will help consumers who are shopping for coverage decide whether the policy they are being offered is fairly priced. It would also highlight key red flags that consumers should look for when evaluating a policy quote. It could also be used to determine if a current Universal Life insurance policy owned by the consumer is worth keeping.

Expand CFA’s Life Insurance Rate of Return Evaluation Service. As discussed above, CFA aims to conduct outreach and marketing efforts to increase awareness of our life insurance rate of return analysis service. In an updated version of our service, consumers could securely submit information and policy documents to CFA online and our staff experts would provide them with an analysis of their coverage and options for them as they consider what to do with their policy. Since its inception, CFA’s EvaluateLifeInsurance.org program has required customers to pay a small fee to cover the evaluation costs, but in an expanded program, the fee will be waived for low-income consumers.

Regulatory or Legislative Efforts

 Many of the key problems in life insurance require public policy advocacy, either regulatory or legislative, since education alone will not defeat these problems. The virtual non- existence of state regulation leaves many consumers vulnerable to abusive practices in their state. The sale of unsuitable products, markets rife with hidden kickbacks, and the targeting of low- income populations with high-priced, low-quality policies are all areas in which needed reform has languished and advocacy is critical. Because insurance is regulated by the 50 states, reform efforts are particularly difficult to achieve on a wide-spread basis without a concerted and coordinated advocacy project. CFA is uniquely positioned to conduct public policy research and advocacy on life insurance issues, as our team includes two former state insurance commissioners, both actuaries, and a Ph.D. researcher who prepared a 2011 report on low- income life insurance policies for the Ford Foundation.

Expanding CFA’s Regulatory and Legislative Work to Improve Consumer Protections in Life Insurance and Annuities

1.  Develop Reforms to Prevent Funeral and Burial Insurance Rip-offs

With assistance from the CFA member organization, Funeral Consumers Alliance, CFA has plans to examine and propose needed reforms for funeral and burial insurance. These small whole life insurance policies are marketed mainly to LMI households. In the past, African-American families, especially those in the South, have been particularly targeted by marketers of these policies. Funeral and burial insurance is almost always more expensive than other types of life insurance. Premiums paid frequently greatly exceed claims paid, and because monthly premiums rise as policyholders age, the policies are frequently terminated with inadequate surrender values because of high commissions and administrative expenses. Some consumers terminating policies think, or are led to think, that they are owed no refund of any premiums paid.

Funeral and burial insurance is frequently and increasingly marketed and sold by funeral homes that add their own expense to the product.

The last careful research on this product and its purchase was done in the 1990s. This research by the National Association of Insurance Commissioners (NAIC) revealed, among other facts, that there were 16 million of these small whole life policies in force. We have plans to update this research by, for example:

• Researching all small whole life insurance policies using sources such as the Federal Reserve Board’s Survey of Consumer Finances and industry sources such as LIMRA.
• Identifying and investigating the finances of those companies selling burial and insurance policies with an emphasis on those marketing to LMI markets, especially African-American populations, by television and door-to-door.
• Examining the policies of these companies.
• Examining burial and insurance policies marketed by funeral homes, especially those to LMI and African-American populations.
• Contacting Legal Aid and Legal Offices throughout the South for evidence of related consumer complaints.
• Reviewing consumer complaints received by the Funeral Consumers Alliance.
• Examining existing state consumer protections.
• Proposing creation or strengthening of needed protections.

In conjunction with this research, we will develop model reforms and work with our state-based members and allies, including the Funeral Consumers Alliance, to advocate for these reforms.

2. Monitor and Weigh in on the Work of the NAIC’s Annuity Suitability Working Group

This working group has been developing suitability model legislation that weighs heavily in favor of insurer interests and against the public interest. With resources and media attention, CFA could play a more significant role in combatting the dangerous proposals being considered by the NAIC and some state regulators and moving toward real suitability requirements.

3. Research and Report on the Life Insurance and Annuities-related Actions of State and Federal Regulators

CFA has plans to produce an annual scorecard assessing regulators in which we identify best and worst practices and make recommendations for how regulators can best serve consumers in their jurisdictions. One particular focus of this effort involves regularly reviewing and rating state market conduct exam efforts (as this is particularly important in life insurance, since states have no rate control authority).

4. Research and Undertake Reform Action in Target States on “Reverse Competition” Lines of Insurance

Reverse competition occurs when competition drives premiums up, rather than down. This happens where the insurers see the intermediaries (brokers, banks, car dealers, etc.) as the “consumer” rather than the ultimate rate payer, the individual consumer. This unhealthy practice prevails in credit insurance and CFA has plans to focus first on credit life insurance. The findings would likely also apply to other lines of insurance which suffer from this phenomenon (for example, credit unemployment insurance, credit health insurance, title insurance, and forced-placed insurance). CFA will develop model reform proposals to advocate in select states in partnership with CFA members and allies.

Consumer Federation of America’s Insurance Education, Advocacy and Impact Credentials

 The Consumer Federation of America (CFA) is an association of more than 250 nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Its membership includes well-known national organizations such as AARP and Consumer Reports and scores of state and local consumer organizations that advocate for marketplace protections and serve community members directly.

Since insurance is the fourth leading cost item for consumers and is a service that requires delivery on promises made sometimes many years after the contract is signed, it is an area of demonstrated abuse. Thus, CFA has focused on insurance matters since its creation and in a concentrated manner for over 25 years and has assembled a team of experts that has had a significant impact on insurance markets, industry practices, and company behavior, achieving many reforms through research, advocacy and education for consumers.

The current team includes two former state insurance commissioners, both of whom are both professionally certified actuaries. One is a life insurance actuary; the other is a property/casualty insurance actuary. The team also includes an insurance expert who sits on the

U.S. Department of Treasury’s Federal Advisory Committee on Insurance and formerly was executive director of California’s leading insurance consumer advocacy group, Consumer Watchdog. The team also includes an investor protection expert who sits on the SEC’s Investor Advisory Committee, an attorney with expertise in financial services regulation, two insurance researchers (one a PhD) and media support staff. CFA plans to expand its team further as its programs grow.

As insurance is regulated at the state level, the team interacts with CFA’s state and local membership groups in order to reach insurance commissioners and policymakers in their home state. Among our members who have worked significantly on insurance issues are, for example, the Maryland Consumer Rights Coalition, Texas Appleseed, Consumer Federation of California, Florida Consumer Action Network, New Jersey Citizen Action, and Minnesota Asset Building Coalition.

Over the past several decades, CFA has exposed, highlighted, and challenged unfair, deceptive, and illegal practices in the areas of both life and property-casualty insurance.

In recent years, CFA has uncovered, and convinced about half of the states to ban, the use of complex computer models that vary prices not on the risk of the policyholder but on the policyholders’ propensity to shop, raising prices particularly on the most loyal customers. Over the years, CFA has called upon state regulators to stop unfair price hikes in Universal Life Insurance products, stopped the insurance industry’s effort to weaken solvency standards on a national basis in life insurance during the Great Recession, and advocated for improved annuities suitability standards. Under a grant from the Ford Foundation, CFA has previously studied life insurance for LMI families. The study found a disturbing degree of LMI families without life insurance or with inappropriate life insurance, including vastly overpriced burial insurance coverage.

Most recently, CFA has successfully advocated for insurer refunds and credits to consumers for excessive auto insurance prices when COVID-19 caused a dramatic drop in driving and car accident claims. That push led to over $11 billion in paybacks to consumers, and the effort to require further paybacks is continuing today. CFA has also worked intensively on the ways in which low-and moderate-income Americans have suffered under unfair pricing systems in the auto insurance market that raise state-required auto insurance premiums to unaffordable levels for many of the LMI.

Finally, in spite of an industry that spends of billions of dollars promoting their products and millions lobbying to avoid accountability, CFA’s current and expanding efforts are the best antidote to under-regulation, false promises, unfair claims processes, and discriminatory pricing.

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“This admission is stark evidence that we need disclosure from life insurers to let us know who the ‘some people’ are who face delay and what ‘circumstances’ lead to such delay?” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner. “Consumers need to know answers to such basic questions as: Will vaccines be required?  Will negative PCR tests be required?  Will different standards apply by age grouping?”

ACLI pointed out, and CFA agrees, that delay “is not a rejection.”  But the reason for any delay would be to seek COVID-related medical information that might lead to a rejection. It would be logical to assume that some rejections do occur after the delay period.

CFA copied their letter of response to ACLI to the National Association of Insurance Commissioners (NAIC).  CFA again asked that NAIC consider adopting a model rule for life underwriters requiring transparency and reasonable standards regarding delay or denial of life insurance coverage because an applicant has or previously had COVID.

“The NAIC rule should require that insurer underwriting rules be made public prior to use, be transparent, and provide standards for delaying or denying of coverage. We also asked leading life insurers to consider voluntary transparency about COVID-related life insurance underwriting standards,” said James H. Hunt, CFA’s Life Insurance Actuary and former Vermont Insurance Commissioner.  “The public needs some understanding of the basis on which their applications will be evaluated in the COVID era.”

Given the delays in coverage, the likelihood of some rejections, and a lack of clarity about the current practices being deployed by leading writers of life insurance, CFA believes it falls squarely upon the NAIC to provide transparent standards for COVID-era underwriting unless some voluntary action is quickly taken by the industry.

“We believe that transparency regarding this new practice is a modest accommodation that carriers could make to provide consumers the opportunity to know with which insurers they will encounter COVID-related delays based on their particular situation,” Hunter said. “A voluntary approach to this adopted now might allow insurers to have varying standards, which might not be possible if regulators are required, by insurer inaction, to set the standards. The many millions of Americans who have had COVID, as well as those who fear it, need access to this information to help them make important life insurance decisions for their families.”

Contact: J. Robert Hunter, 703-528-0062

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“People who had COVID-19 and recovered who need life insurance coverage to protect their families should be able to get it under clear underwriting rules publicly available for them to review,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner. “We understand reasonable precautions are needed, but to harm COVID patients and their families again is unacceptable. State regulators need to step in and issue a rule to protect consumers from arbitrary insurance company practices. Transparency and reasonableness in underwriting must be the standard.”

In Europe, some life underwriters are imposing waiting periods before COVID-19 patients, even those who have recovered, can apply for coverage. Further, some insurers are limiting coverage for certain age groups as part of their response to the pandemic. Still others are postponing applications for anyone who had COVID-19 or lived with someone who got the disease.

In order to guard against the use of arbitrary or unfair underwriting rules in the United States, the NAIC should adopt a model rule for life insurance companies. The rule should 1) require underwriting rules relating to COVID be made public before they are used and 2) establish reasonable standards as to what would trigger a delay or denial of coverage.

CFA also sent the letter to the CEOs of the leading life insurance companies in America and their trade organization asking them to consider voluntary action to use transparent and reasonable underwriting rules related to COVID.

“Millions of consumers have had COVID-19, and without a model rule many of them could be unreasonably denied coverage,” said James Hunt, a life insurance actuary and former Vermont Insurance Commissioner. “NAIC has an opportunity to get ahead of this issue and make sure Americans who suffered with COVID are treated appropriately.  Insurers have the opportunity to take voluntary action to assure the nation that their underwriting of COVID related risks will be reasonable and transparent.”

Contacts:
J. Robert Hunter, 703-528-0062

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Good afternoon. I am Barbara Roper, Director of Investor Protection for the Consumer Federation of America. I appreciate the opportunity to testify today on the Department’s advice rule.

Since the comment period closed, I have had a chance to review the comments filed by broker-dealer and insurance firms and their lobbyists in response to the proposal. I have to admit it was a dispiriting exercise. And I was particularly taken aback by the cynical claim, repeated here today, that the Preamble’s explanation of how the reinstated definition of fiduciary investment advice would apply to rollover recommendations would somehow “effectively reinstate the invalidated 2016 fiduciary definition,” just because the Department indicated it might not always interpret the definition’s five-part test exactly as it had in the past.

The Department was wrong, in our view, to reinstate the five-part test, which it has previously found enables firms to evade their fiduciary obligations in circumstances where they are clearly functioning as advice fiduciaries and are reasonably relied on as advice fiduciaries by retirement savers. The amount of comment the Department has received on this point demonstrates just how unwise it was to reinstate the definition through a final rule, with no opportunity for input.

But it is patently absurd to suggest that what the Department did closely resembles the 2016 rule. On the contrary, having made the case for why rollover recommendations should be held to a fiduciary standard – their importance to retirement savers’ financial well-being, the incentives firms have to recommend inappropriate rollovers – the Department only modestly expanded the portion of rollovers that will be covered by the definition, and left many of the most problematic rollovers outside the definition.

Saying that rollovers in the context of an ongoing relationship constitute fiduciary investment advice is a small step in the right direction, but it is a far cry from unequivocally covering all rollovers in the definition, as the 2016 rule would have done. Similarly, saying that firms may need to do more than stick a disclaimer in 6-point type in a disclosure document to avoid any fiduciary obligations is appropriate, as far as it goes, but it would still appear to leave firms plenty of room to come up with a way to avoid those obligations, even in circumstances when the retirement saver will rely on those recommendations as a primary basis for their investment decision.

What comes through loud and clear from these industry comment letters is that broker-dealers and insurers will be satisfied with nothing less than a full return to the bad old days when, as was documented at the time, firms could recommend rollovers without any regard to the best interests of the retirement saver and all too often did just that, costing retirement savers billions in lost savings.

But, even if we are wrong, and the Preamble interpretation would have the effect predicted by industry of causing vastly more rollover recommendations to be considered fiduciary investment advice under ERISA, it would still not have the effect these industry groups claim. It would not, for example, cause simple sales recommendations to be held to a fiduciary standard.

On the contrary, under the Department’s proposed new class exemption, fiduciary investment advice would be held to non-fiduciary sales standards modeled, with only minor differences, on the SEC’s Regulation Best Interest for broker-dealers and the NAIC’s model rule for annuities sales. These are standards that these same industry groups strongly support when applied to non-retirement accounts, so it is difficult to understand their predictions of dire consequences if these same industry-friendly sales standards are applied to advice regarding rollovers.

Since the Department issued its proposal one day before the SEC’s Reg. BI was due to take effect, and the comment period closed when that new rule had been in effect for just over a month, there hasn’t been time for us – or the Department – to comprehensively study whether, or to what extent, Reg. BI has caused firms to change the way they do business. In particular, there hasn’t been time to fully assess whether Reg. BI has caused firms to abandon incentive practices that the Department has previously determined, as part of the regulatory record for this proposal, are likely to induce financial professionals to base their recommendations on their own interests, rather than their customers’ best interests. We have even less information regarding the effect of the NAIC model rule.

To the extent possible within the rushed timeframe for this rulemaking, however, we have begun a review of the disclosures firms provide under Reg. BI in which they describe their conflicts of interest and compensation practices. The first thing I can report, based on that review, is that even the best of these disclosures are likely to be of little value to the typical, financially unsophisticated retirement saver. The worst of these documents are dense and unreadable and full of boilerplate, and we’ve seen far more bad examples than good.

Now, we also have the Wall Street Journal reporting that the new Customer Relationship Summaries brokers and investment advisers are required to provide may be inaccurate. Specifically, at least 1,300 firms appear to falsely claim to have no disciplinary record, when in fact they or their reps have a history of customer complaints, regulatory actions against them, or even criminal conduct. And 80 firms failed to answer the question at all. If firms are getting something this basic wrong – or if they are deliberately misleading investors – what does that tell us about the quality of their compliance programs or the value of these disclosures in protecting investors?

Because the Department relies on these Reg. BI and Advisers Act disclosures to satisfy compliance with its own proposed exemption, it has an obligation to review them carefully to determine whether they will in fact lead to informed investment decision-making. The inescapable conclusion from an honest review of the documents is that they will not.

The other thing that begins to emerge, if you dig into the details of these disclosures (and you will have to dig), is that little seems to have changed in brokerage firms’ conflicts of interest and compensation practices since Reg. BI was adopted. For example, the SEC made headlines by banning time-limited, product-specific sales contests that never really existed at brokerage firms. But it did nothing to address production-based contests and incentives of the type that have been associated with inappropriate rollover recommendations. A review of large retail brokerage firms’ Reg. BI disclosures makes clear that production-based incentives remain commonplace.

Meanwhile, the conflict that has been shown over the years to be most responsible for abusive sales practices – the heightened remuneration brokers can receive selling complex, opaque investments, such as most types of annuities, non-traded REITs, and private securities – remains unaddressed. Other problem areas previously identified by the Department, such as certain types of recruitment incentives, ratcheted payout grids, and third-party compensation from product sponsors can all be found, to a greater or lesser degree, among the large retail firms whose disclosures we have reviewed.

It is virtually impossible to ascertain from most of these disclosures what, if anything, the firms are doing to “mitigate” these conflicts. A few firms make boilerplate statements about addressing conflicts through a combination of training, supervision, and disclosure. But there is no evidence in the disclosures we’ve reviewed of meaningful changes to reduce widespread, harmful incentives, certainly nothing on the order of magnitude needed to reassure retirement savers that their interests are likely to come first.

We do not pretend to have conducted a comprehensive review of industry compensation practices and conflicts of interest since Reg. BI was implemented. In the rushed process the Department has adopted for this rulemaking, there simply hasn’t been time – for us or the Department – to do so. Only the firms themselves are in a position to tell us whether, or to what extent, they have altered their incentive systems since Reg. BI was implemented. Any such evidence is notably absent from the comment letters brokers and insurers submitted in response to this rulemaking. If industry had a positive story to tell in that regard, presumably they would have told it. Their silence is deafening.

In conclusion, there is simply no evidence to support a finding that Reg. BI or the NAIC model rule will adequately protect retirement savers, and the evidence that does exist leads to the opposite conclusion. The Department therefore cannot reasonably move forward with this rulemaking based on the evidence before it.

Contact: Barbara Roper, 719-543-9468

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Last week, the comment period closed on the Department of Labor’s proposed advice rule, which was strongly opposed by groups representing workers, retirees, and investors concerned that it decreases the likelihood financial professionals will be held to a fiduciary standard when providing retirement investment advice and dramatically weakens the standard when it does apply. In short, it is precisely the rule for which broker-dealers and insurers have been lobbying for years.

Instead of taking a victory lap, however, these industry groups are apparently enraged that the DOL didn’t actually restore all the ways they were able to rip off retirement savers in the past. Their beef is that DOL has left open the possibility that they might, under certain very limited circumstances, be considered fiduciaries when making investment recommendations to retirement savers. Their claim, as one industry attorney put it, is that this modest expansion “would effectively reinstate” the Obama-era fiduciary rule and “thus severely harm the ability of millions of Americans to access investment assistance.”

This argument is so clearly false, one is left to wonder whether the real intent is to set up the classic Goldilocks defense. If industry groups claim the rule is “too hot,” and advocates for retirement savers argue the rule is “too cold,” DOL is likely to claim that they must have gotten it “just right.” (They did not.) But a closer read of their comment letters suggests that, despite having been given 99.9% of what they asked for, brokers and insurers are genuinely outraged over that missing 0.1%.

Reopening the Loopholes

Although the groups have lots of suggestions for how to “improve” (further gut) the standard itself, their primary issue involves the DOL’s decision as part of this regulatory package to reinstate (and reinterpret) the 1975 regulatory definition of fiduciary investment advice. Under that definition, retirement investment advice must be provided on a regular basis, and subject to a mutual agreement between the client and the adviser that the advice will form a primary basis for the individual’s investment decision, for the advice to be held to a fiduciary standard.

Brokers and insurers are clearly delighted to see that outdated definition reinstated, since it served for years to ensure that their recommendations were never held to a fiduciary standard, even when they marketed those services as trusted advice and retirement savers relied on them accordingly.

They are very disturbed, however, by indications from DOL that, going forward, it might not always interpret that definition exactly as it has in the past, particularly as it applies to rollover recommendations (recommendations to pull money out of a workplace retirement plan or pension and roll it into an IRA). For example, DOL did not reinstate a 2005 policy that took the patently absurd position that rollover recommendations by someone who is otherwise not a fiduciary would not be considered fiduciary investment advice under ERISA.

Whether the standard applies to rollover recommendations is critically important, because such recommendations are among the most consequential decisions workers make and come with huge incentives for the financial firms to recommend the rollover regardless of the worker’s best interests.

Insurers, in particular, seem to view the failure to restore a blanket exemption for their rollovers as a betrayal of the first order, even though the Department simultaneously made clear that one-time recommendations to roll money out of a retirement plan or pension to purchase an annuity would still typically not be considered fiduciary advice.

DOL did, however, indicate that rollovers as part of an ongoing advisory relationship might be considered fiduciary advice, that it might not be enough to provide a disclaimer in six-point type to evade the standard, and that firms really ought to expect that retirement savers generally are relying on their recommendations as a primary basis for their decisions.

Based on this analysis, the DOL seemed to suggest that rollover recommendations by brokers often would be captured by the definition. This clearly came as a nasty shock to members of the brokerage industry, who had convinced the SEC not to hold them to a fiduciary standard by arguing that they offer episodic, rather than ongoing, advice.

Watering Down the Standard

Under the proposed exemption, brokers and insurers whose recommendations fall within the definition of fiduciary investment advice would still to be permitted to engage all their usual conflicts of interest and to do so subject only to the non-fiduciary standards imposed under the Securities and Exchange Commission’s (SEC’s) recently implemented Regulation Best Interest (Reg. BI) and the National Association of Insurance Commissioners’ (NAIC’s) updated suitability standard for annuities sales.

Those are standards that brokers and insurers have strongly supported, precisely because they permit firms to operate with a minimum of “disruption” to the practices that have been so profitable to them, if not their customers, for years. So why is the prospect that DOL might hold their retirement investment advice to these same standards setting off alarm bells?

A review of industry comment letters suggests that the culprit may the requirement that financial professionals document their basis for concluding that a recommended rollover is in the retirement saver’s best interest. Neither the SEC nor NAIC imposes a similar documentation requirement, suggesting it only as a “best practice.”

That feature of the DOL proposal was suggested for elimination in virtually every letter submitted on behalf of brokers and insurers. Clearly they don’t want to have to show that analysis, even in the cursory manner anticipated by the DOL.

If that’s the explanation, we should be concerned by how desperately brokers and insurers seem to want to avoid any accountability for their rollover recommendations. Their adamant opposition suggests that the bad old days of routine inappropriate rollover recommendations could be making a comeback, despite the new SEC and NAIC rules.

But it also appears to be a gross over-reaction. With best interest undefined in the SEC and DOL rules, and defined as a suitability standard by NAIC, firms are likely to be able to get away with any minimally plausible explanation with regulators who have shown themselves extremely reluctant to second-guess such recommendations. And retirement savers are likely to see few if any benefits.

That makes the intensity of the industry’s opposition to such a weak and watered down rule something of a mystery.

Time to Start Over

After a review of the comments, however, one thing is crystal clear: DOL’s decision to reinstate the 1975 definition as a final rule, without any consideration of whether a different approach is warranted, was entirely inappropriate. The Department should withdraw the rule immediately and issue a revised proposal, one that truly closes loopholes in the definition, with adequate opportunity for all interested parties to provide input.

Failing that, Congress should step in and solve the problem for them by adopting new legislation that closes loopholes in the regulatory definition once and for all and ensures that all the recommendations retirement savers reasonably rely on a trusted investment advice, including all rollover recommendations, are held to a high fiduciary standard.

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• Make it much easier for financial firms to avoid any fiduciary responsibility when advising retirement savers about their retirement plan and IRA investments.
• Deprive retirement savers of critical protections when the risks and conflicts are greatest.
• Substantially weaken protections against conflicts of interest when the fiduciary standard does apply.
• Render the standard unenforceable for IRA investors, leaving millions of retirement savers without recourse when they are victims of harmful advice.

With their retirement security on the line, workers and retirees need and deserve retirement investment advice they can trust. The DOL proposal would instead expose them to conflicted sales recommendations dressed up as advice. It should be withdrawn in its entirety and a new rule proposed that protects workers and retirees, not the excess profits of well-heeled financial firms.

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CFA and CEJ made the request after industry trade groups submitted a letter late last month urging the Committee to speed approval of the current draft at an upcoming meeting of the NAIC scheduled for December 8, 2019.

“The fact that all the industry trade associations of insurers and agents selling annuities are euphoric about the proposed revisions while consumer groups are aghast at the anti-consumer nature of the proposal is stark evidence of how biased the proposal is in favor of industry interests over consumers,” said CEJ Executive Director Birny Birnbaum. “By allowing insurers and producers to falsely claim to be acting in consumers’ best interest when there is no such requirement and when there is no meaningful constraint on conflicts of interest that would compromise advice given to a consumer, the proposal will mislead consumers into expecting protections the rule does not provide.”

CEJ and CFA identified the following as particularly critical shortcomings in the current draft:

• It does not impose a true best interest standard. The current draft requires that the producer have a reasonable basis to believe the recommended annuity meets the consumer’s needs. That is not a true best interest standard; it is simply a restatement of the obligation to make suitable recommendations. Calling it a best interest standard is misleading. Moreover, the standard is vague and full of loopholes.
• It does not rein in the most harmful and pervasive conflicts of interest. The proposed standard excludes all forms of cash and non-cash compensation from the definition of material conflict of interest. As a result, compensation practices at the heart of a whole host of recent life insurance and annuity sales scandals would be preserved. The associated conflicts would not even have to be mitigated to minimize their harmful impact.
• Its ban on certain sales contests and incentives is too narrowly drafted to promote real reform. The proposed ban on time-limited, product-specific sales contests and incentives appears, at first glance, to be a major step toward eliminating some of the most anti-consumer practices common in the industry today. However, closer scrutiny reveals that it is so narrowly drafted that its only effect will likely be to force insurers to redesign, rather than eliminate, such practices.
• It relies heavily on disclosures that are poorly designed and not provided at the appropriate time. In a number of areas, the proposed standard is satisfied through disclosure, but the Committee has failed to test the proposed disclosures to ensure that they are effective. Moreover, because of the proposal’s lax delivery requirements, key disclosures, such as the Producer Relationship Disclosure Form, are likely to come too late to benefit the consumer. As a result, the disclosures are likely to do more to shield insurers and producers from liability than to inform or protect consumers.

“The Committee obviously drew heavily on the SEC’s Regulation Best Interest in developing its model, despite the fact that Reg BI has been strongly opposed by investor advocates, is the subject of a legal challenge by several state attorneys general, and has been criticized by state securities regulators as inadequate, prompting some to draft their own, stronger regulations,” said CFA Director of Investor Protection Barbara Roper. “Worse, although annuities sales are an area in particularly urgent need of reform, the NAIC model is actually substantially weaker than the SEC rule in several important ways. Under no circumstances should NAIC adopt this proposal in its current form,” Roper added. “To do so would be a complete dereliction of its duty to protect insurance consumers.”

Birnbaum added, “There is a massive disconnect between what an average consumer would understand as an insurer or agent acting in the consumer’s best interest and what the proposed model regulation defines as a best interest standard of care.”

A copy of the CEJ-CFA letter is available here.

Contacts:
Birny Birnbaum, CEJ, 512-784-7663
Barbara Roper, CFA, 719-569-9159

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In the comments, the advocates argue that insurers and producers should be required to act in the best interests of consumers, best interest standard provisions must be stronger, and the best interest standards must include substantive prohibitions on conflicts of interest.

The consumer and union groups were AFL-CIO, Americans for Financial Reform Better Markets, Center for Economic Justice, Consumer Action, Consumers Union, Consumer Federation of America, EPI Policy Center, National Consumers League, National Employment Law Project, Pension Rights Center, UnidosUS (formerly NCLR), U.S. PIRG, and the Woodstock Institute.

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The conflict of interest (or “fiduciary rule”) rule requires all financial advisers, including broker-dealers and insurance agents, to act in their customers’ best interest rather than their own, charge reasonable fees, and refrain from making misleading statements.

This is a major win in the decades-long fight to ensure that investors receive appropriate protections when they turn to financial professionals for help with their investments.

So what does that mean for you?

If you are like most people, you probably assumed all financial advisers were already required to put their customers’ interests first. But, while registered investment advisers were required to meet that standard, broker-dealers and insurance agents generally were held to a lower “suitability” standard. That means that they were allowed–and often did–recommend investments that cost the customer more, but made the adviser more money, as long as those investments were generally “suitable” for the customer.

Beginning Friday (June 9, 2017) that changes. But only for investment advice regarding retirement accounts. That includes advice about workplace retirement plans, such as 401(k) plans, as well as individual retirement accounts (or IRAs). For all other non-retirement accounts, the old rules still apply.

The following are a few of the changes investors who previously received advice from non-fiduciary advisers can expect as the rule takes effect.

1) You should see new, more investor-friendly investment options recommended in your IRA.

In order to meet the best interest standard, your adviser may recommend new and different types of shares of mutual funds, such as “T” shares, that were introduced in response to the rule. These new shares can cut several percentage points off the sales charges you pay to purchase those funds. That’s money that will stay in your retirement account rather than going to pay your financial adviser.

Or your adviser may offer new “clean” shares, which allow you to negotiate how much she gets paid for the services she provides in selling you that fund.

Mutual fund investors aren’t the only ones who’ll see benefits from the rule. Annuities have also been given a tune-up. New annuities with more investor-friendly features, including much shorter surrender periods and lower fees, have been introduced in response to the rule.

2) You should get a better deal if you rollover money from your workplace retirement account.

Financial firms make big money encouraging retirement savers to move their money out of workplace retirement plans and into IRAs managed by the firm. Even reputable firms have been accused of recommending such rollovers when the customer would have been better off leaving his money in the company plan, where investment costs are often considerably lower.

The new conflict of interest rule only allows such recommendations if they are in the best interest of the customer. One possibility is that you will see fewer rollover recommendations once the rule takes effect, but firms may also respond by offering retirement savers a better deal on their rollover investments.

If your adviser recommends you roll money out of a company 401(k) plan and into an IRA, ask on what basis she determined that you would be better off in the IRA. Ask in particular how your costs will compare. While costs shouldn’t be your only consideration, minimizing costs is one of the surest ways investors have of improving their long-term investment performance.

3) You may be encouraged to move your money to a fee account.

Some firms have concluded that the easiest, cleanest way to minimize conflicts is by moving clients from commission accounts to accounts where investors pay a fee for advice. That can take the form of a flat fee, hourly fee, or a percentage of assets under management.

Fee accounts can offer a good deal for investors, assuming the fees are reasonable and the investor wants and benefits from the ongoing advice offered with such accounts. When firms have both fee and commission accounts available, the rule requires that advisers recommend the type of account that is best for the investor.

If your adviser suggests moving from a commission account to a fee account, ask on what basis she determined you’d be better off in a fee account. In particular, ask how your costs in the fee account would compare to the costs you previously paid in your commission account.

If your costs would go up, ask what additional services you will receive to justify those higher costs, and determine whether those are services you want or need. Don’t be afraid to try to negotiate a lower fee. Some firms have reportedly been willing to lower fees to match average commission costs from previous years in order to demonstrate that the fee account really is in the customer’s best interests.

If your adviser insists on moving you to a fee account and you prefer to continue to pay through commissions, you can always look elsewhere to get retirement advice on the terms you prefer. Most brokerage and insurance firms continue to offer commission accounts as an option under the rule.

* * *

The good news about Friday’s conflict of interest rule implementation comes with a couple of caveats.

First, the rule only applies to retirement accounts. If you have been working with a non-fiduciary adviser, such as a broker-dealer or insurance agent, you’ll likely continue to get suitable sales recommendations rather than best-interest advice in your non-retirement accounts.

Second, only portions of the rule take effect in June. Other provisions, including those that make the best interest standard for IRA advice legally enforceable, aren’t scheduled to take effect until January 2018.

Third, while most firms have moved forward in good faith to implement the rule in an investor-friendly fashion, others have been more resistant. Some, for example, have threatened to drop smaller retirement accounts rather than serve them under a best-interest standard.

What should you do if this happens to you? Take a moment to count your lucky stars. A firm that will only “advise” you if it can profit unfairly at your expense is not where you want to keep your money. There are many firms willing to serve even the smallest accounts under the new standard and at a reasonable cost.

Once you find such an adviser, have them do a careful review of your existing investments. Chances are your money is in investments that pay generous compensation to the seller, but charge high fees to the investor or expose you to inappropriate and unnecessary risks. In these circumstances, the long-term benefit to your retirement savings from switching advisers – tens or even hundreds of thousands in added savings once your reach retirement – should greatly outweigh any temporary inconvenience of moving accounts.

Finally, the benefits provided by this rule could still be snatched away. The Department of Labor, which is conducting a “reconsideration” of the rule, is under heavy pressure from special-interest lobbyists to roll back and water down its central protections. If your adviser is one of those bellyaching about the rule, perhaps it is time to consider switching to one who eagerly embraces their fiduciary duty to minimize conflicts of interest and put the customer first.

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The increases are being applied to cost of insurance (COI) rate schedules by at least three insurers: AXA Equitable, VOYA Financial (formerly ING) and Transamerica, which have notified their agents of this action.  Other insurers may also be doing this so CFA has asked the commissioners to extend their research beyond just these three insurers.

“We request that you review these practices to determine if the insurers are using COI increases to maintain profits when the interest rates they have been crediting to cash values have been reduced to the contractually guaranteed rates.  CFA believes that you should require UL insurers to justify COI rate schedule increases by demonstrating that current mortality experience of the affected block(s) of business exceeds pricing assumptions when the policies were sold,” said James H. Hunt, CFA’s Life Insurance Actuary and former Vermont Insurance Commissioner.

“Our fear is that this could become a widespread practice and could, in effect void the interest rate guarantees in affected policies, as we explain in detail in our letter,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner.

Contact: J. Robert Hunter, 703-528-0062

The Consumer Federation of America is a national organization of more than 250 nonprofit consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.

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Employer-provided disability insurance, along with other forms of insurance such as workers’ compensation and Social Security Disability Insurance (SSDI), provide financial protection to employees unable to work because of injury or illness. This type of insurance, often called group disability insurance, provides the employee with payments equal to about 60 percent of his or her salary or wages.  The “waiting time” until payments are made depends on the insurance plan offered by the employer and can vary anywhere from one week to six months from the time the employee stops working due to the illness or injury.  About one-third of workers are protected by this insurance, with monthly premiums (paid for by the employer, employee, or some combination) in the range of $10-$30.   More than 600,000 of these insured workers are currently receiving long-term disability benefits in excess of $8 billion annually.[1]

In March 2012, the Consumer Federation of America (CFA) and Unum commissioned a survey of employees about their knowledge of and attitudes toward group disability insurance.  The survey was conducted by Opinion Research Corp (ORC), which contacted 3,000 adults at least 18 years of age by landline or cell phone during three consecutive weekends.  Of this group, 1,191 identified themselves as full- or part-time employees and were interviewed.  This sample population is broadly representative of the population of all employees, and the survey data were then weighted to more exactly represent the characteristics of all employees.  The margin of error of the aggregate data is +/- 3 percentage points.  On request, CFA and Unum can provide a more detailed description of ORC’s survey methodology.

The survey began by asking respondents about their knowledge of the extent to which injury and illness affect being able to work.  It then inquired about financial hardships respondents would face if they were unable to work for three and for 12 months.  It continued by asking how much respondents know about group disability insurance and their principal sources of information about this insurance.  Under the correct assumption that employees know relatively little about group disability insurance, the survey then explained this insurance and compared it to SSDI and workers’ comp, before asking respondents a series of question about their attitudes toward disability insurance and related policies.  ORC also asked respondents standard demographic questions – including age, gender, ethnicity, children, income, and education – as well as questions about their place of employment.

Employee Knowledge of Disabilities and Group Disability Insurance

The survey revealed that most employees underestimate the amount of time individuals will be away from work due to illness and injury.   On average, the surveyed employees thought that 25 percent of those who become disabled and are unable to work for at least three months remain disabled for at least two years.  But in actuality, it’s twice that. Half of the disabled workers who are out of work for three months remain disabled for more than two years.[2]

Employees also are far more likely to believe that injuries (66%), rather than illnesses (34%), cause the majority of disabilities that keep employees from work for at least three months. But most employees have it very wrong. According to the Council of Disability Awareness, 90 percent of all disability claims paid are for common illnesses and health conditions.[3] The reason for this misperception appears to be the more fundamental misperception that most disabilities are work-related, when, in fact, far more disabling conditions are related to conditions not attributable to work.

Employees, however, do generally understand the probability of workers not being able to work for at least three consecutive months during their entire working career.  Their typical estimate in the survey was one-third, which is consistent with findings from the Society of Actuaries that three out of 10 employees between the ages of 35 and 65 will be out of work for three months or longer due to an accident or illness.[4] For a younger cohort, the Social Security Administration estimates that just over 1 in 4 of today’s 20-year-olds will become disabled before age 67.[5]

Most employees recognize that they do not understand group disability insurance.  Only 13 percent said they know “a lot” about this insurance, while more than one-third (35%) said they know only “a little,” and more than half (52%) said they know “not very much” or “nothing at all.”  Those indicating the poorest understanding tended to be young adults and those from low- and moderate-income households.  For example, 65 percent of low-income households (under $25,000 annual incomes) and 62 percent of moderate-income households ($25,000-$50,000 incomes) – compared to only 35 percent of upper-middle income households ($75,000-$100,000 incomes) and 37 percent of upper-income households ($100,000 incomes and above) – said they knew nothing at all or not very much about group disability insurance.  Two- thirds (66%) of younger employees (18-34) admitted to knowing “not very much” or “nothing at all” about disability insurance.

This lack of understanding may even extend to knowing whether employees have access to or are covered by group disability insurance at work.  Two-thirds of employees (65%) believe their employers offer it. But according to the Bureau of Labor Statistics, only 32 percent of working Americans have access to long-term disability coverage through their employer.[6]

Moreover, among those employees who think they have this insurance, most acknowledge that they do not know how much it costs or the scope of the benefits.  Only 41 percent said that they “know for certain” the amount they pay in monthly premiums for this coverage, while only 47 percent were sure they knew what the amount of the benefit they would receive if they became disabled.  And only 63 percent said they know whether they “pay any or all of the monthly premiums.”  Most do claim to know (83%), however, if the type of disability insurance they have is short-term or long-term.

Employees are highly dependent on employers for their knowledge of disability insurance.  Nearly three-quarters of employees (72%) of employees who indicated that they knew “a little” or “a lot” about disability insurance cited their present or past employer as their principal information source, while only 11 percent cited media (TV, radio, print, or Internet), 10 percent cited friend or family, and 2 percent identified government sources as their “principal” source.

When the employer does not offer disability insurance, employees are much less likely to know anything about it. Among these employees without access to employer-sponsored coverage, more than two-thirds (69%) said they knew not very much or nothing at all about disability insurance, compared to only 37 percent of employees who have this coverage. Lack of knowledge is especially an issue with employees who work in small organizations that are less likely to offer disability insurance. Sixty-two percent of employees at organizations with fewer than 100 workers admit to not knowing much or nothing at all about the insurance, compared to only 47 percent of employees in larger organizations.

Employee Attitudes about the Importance of Group Disability Insurance and Their Willingness to Pay for It

Despite their lack of knowledge about employer-provided disability insurance, almost all employees recognize the importance of this insurance and desire its coverage.  Ninety percent think employers should make this insurance available to their employees, 88 percent think is it is important for them personally to be covered, and 61percent say this coverage is “very important.”

There is consistent agreement of the importance of this type of benefit across all age groups.  But not surprisingly, the lower one’s income, the more likely one thinks the insurance is very important – 72 percent for those with incomes below $25,000, but only 51 percent for those with incomes $100,000 and above.  These differences certainly reflect differences in the likelihood one would suffer financial hardship if one did not work for three months because of injury or illness.  Two-thirds (72%) of those with incomes below $25,000, but only 25 percent of those with incomes of at least $100,000, said they would suffer “great hardship.”

These differences should not obscure the more important finding that nearly 77 percent of all employees said they would suffer great or moderate financial hardship if they did not work for three months because of injury and illness, with half indicating great hardship.  Nine out of 10 employees would experience great or moderate financial hardship if the three months lengthened to a year, with 78 percent saying the hardship would be great.

The high value employees place on the availability of group disability insurance and their personal desire for insurance coverage help explain why so many would be willing to pay premiums.  Eighty-six percent said that, if they were required to pay half of a $30 monthly premium, they would do so. And more than half (56%) said they even would be willing to pay the entire $30 premium to gain income protection.  Interestingly, low-income employees appear to be just as willing to make these payments as higher income employees. For example, 53 percent of those with incomes below $25,000 and 57 percent of those with incomes between $75,000 and $100,000 indicated they would be willing to pay the entire premium of $30.

Even though lower-income employees can least afford these premiums, they may well have the greatest need for the income protection.  But, the results of the survey indicate that lower-income employees have significantly less access to group disability insurance when compared to their higher income peers.  While eight in 10 (80%) employees with household incomes of $100,000 or more said that their employer offered disability insurance, disability coverage was available to fewer than half (46%) of those with lower household incomes (<$25,000).

Employee Attitudes about Policies to Increase the Availability and Quality of Group Disability Insurance

Because employees strongly support the value of group disability insurance for all employees and for themselves personally, it is not surprising that they support policies that would increase its availability and quality.  Research and experience show that, if participants support a program, such as a workplace retirement account, automatic enrollment greatly increases their participation in this program.  So it is significant that three-quarters of employees (76%) said it was a good idea for employers to automatically enroll employees in a disability insurance program that these employees could only decline at the outset and annually thereafter.

When employees are informed that small employers are least likely to offer group disability insurance coverage, a large majority (71%) favor “the federal government providing these employers a one-time tax incentive to help them create a group disability insurance option,” with one-third (34%) “strongly favoring” this new public policy.  The lower one’s income, the more likely one is to favor this policy, though a majority of each income group supports the tax incentive.

Finally, a large majority (77%) favor the creation of “independent standards that were used to evaluate individual employer plans.”  Despite the ambiguity of the question – what are the standards and who creates and enforces them? – most employees said these standards are a good idea.

Summary Findings

A survey of a nationally representative sample of  nearly 1,200 employees about group disability insurance revealed interesting facts about employee knowledge of and attitudes about this insurance.

Most employees do not understand serious disabilities and group disability insurance:

• Most underestimate the extent to which employees lose work because of illness and injury.
• Most fail to understand that illnesses, not injuries, are by far the primary reasons for this lost work.
• Among those who think they have this insurance, most do not know how much it costs or what the benefits are.
• By far, the most important source of information about this insurance is the employer.

But having learned something about group disability insurance, almost all employees recognize its value and its desirability for them personally.

• Nearly all employees think that employers should make this insurance available to their employees.
• Nearly all employees think it is important for them personally to have this insurance.
• A large majority of employees said they would be willing to pay a portion of insurance premiums, with more than half indicating they would be prepared to pay the entire premium.
• Certainly this willingness reflects the fact that nearly 80 percent of employees said they would suffer great or moderate financial hardship if they did not work for three months because of injury or illness.

A large majority of employees support policies to increase the availability and quality of group disability insurance.

• A large majority favor automatic enrollment in group disability insurance programs.
• A large majority favor the federal government providing a tax-incentive to small employers to help them “create” a group disability insurance program.
• A large majority favor the creation of independent standards to evaluate the plans of individual employers.

[1] Council for Disability Awareness. (2011). 2011 Long-Term Disability Claims Review. Represents 75 percent of the commercial disability insurance marketplace.

[2] Society of Actuaries. (1987). Commissioners Group Disability Table.

[3] The 2011 Council for Disability Awareness Long-Term Disability Claims review, representing 75 percent of commercial disability insurance market,  http://disabilitycanhappen.org/research/CDA_LTD_Claims_Survey_2011.asp

[4] Society of Actuaries. (1985). Commissioners Individual Disability Table A.

[5] Social Security Administration, Basic Facts, April 4, 2012, http://www.ssa.gov/pressoffice/basicfact.htm

[6] Bureau of Labor Statistics, National Compensation Survey, March 2011, http://www.bls.gov/ncs/ebs/benefits/2011/ownership/private/table12a.htm

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In the CFA-Unum survey,  only 13 percent of all employees say they know “a lot” about this insurance, and less than half of those who say they have coverage know how much it costs (41%) or what its benefits are (47%). When given information about disability insurance, a very large majority (90%) say they want this coverage, and nearly as many (86%) say that, if required, they would pay half of a $30 monthly premium, with more than half (56%) saying they would pay all of this premium, to gain income protection.

“Almost all workers wisely want disability insurance protection and are willing to help pay for it,” said Stephen Brobeck, CFA’s Executive Director.  “But since only about one-third have long-term disability insurance, there is a huge gap between worker desire for coverage and the extent of actual coverage.”

Group disability insurance provides financial protection to employees unable to work because of injury or illness.  Depending on the specific plan, within one week to six months after an employee stops working, he or she begins receiving payments equal to about 60 percent of his or her income.  About one-third of workers are protected by long-term disability insurance, whose monthly premiums – paid for by the employer, employee, or some combination – usually range between $10 and $30.

Employer-sponsored disability insurance provides income protection that is not available from workers’ compensation or Social Security Disability Insurance.  Workers’ comp is available only to those employees who are injured or made ill on the job, but the large majority of injuries and illnesses causing work loss are suffered away from work.  Social Security Disability Insurance benefits average only $13,000 a year.

“The ability to earn a living – our income – is the most valuable asset we have, and protecting that asset is increasingly important,” said Thomas R. Watjen, president and CEO of Unum. “A disabling illness or injury can cause real financial hardship for many individuals and their families, and disability insurance creates a backstop against significant income loss during the period of absence, recovery and return to work.”

The high value employees place on the availability of disability insurance, and their personal desire for insurance coverage, certainly reflect the fact that most workers say they would suffer financial hardship if not able to work.  More than three-quarters of all employees (77%) say they would suffer great or moderate financial hardship if they did not work for three months because of injury or illness, with half (50%) indicating great hardship.  And more than three-quarters (78%) say they would experience great financial hardship if they did not work for 12 months.

Lower-income workers are much less likely to have access to disability insurance coverage, but are more likely to want this coverage, than are upper-income workers. Fewer than half (46%) of employees with household incomes under $25,000, but 80 percent of those with household incomes of $100,000 or more, say that their employer offers disability insurance. Yet, 72 percent of the lower-income group, but only 51 percent of the upper-income group, say that it is very important to them personally to have this insurance coverage.  And lower-income workers are nearly as willing as higher- income workers to pay for this coverage.

“As an employer, I consider group disability insurance to provide important income protection for our employees,” said Brobeck.  “This insurance complements and supplements better-known workers’ compensation and Social Security Disability Insurance programs. The Consumer Federation of America believes that consumers, most of whom rely on wages and salaries for purchasing power, would be well-served if all employers offered employees the opportunity to purchase disability insurance.”

Additional highlights of the CFA-Unum survey include:

Employees Lack Knowledge About Reasons for Disability, Disability Insurance, and Their Own Insurance Coverage

Employees don’t understand the reasons for disability that result in time away from work, underestimate the extent to which workers will miss work, and know little about group disability insurance, including the coverage they may currently have.

• Nearly twice as many employees think that injuries (66%), not illnesses (34%), keep employees from work for at least three months, but the large majority of all disability claims paid are for illnesses and health conditions.
• Employees think that 25 percent of those who become disabled and are unable to work for at least three months remain disabled for at least two years.  But in actuality, it’s twice that. Half of the disabled workers who are out of work for three months remain disabled for more than two years.
• Only 13 percent of employees say they know “a lot” about group disability insurance, while just over one-third (35%) say they know only “a little.” More than half (52%) say they know “not very much” or “nothing at all.”
• Among employees who think they are covered, fewer than half say they know how much it costs (41%) or what the benefits are (47%), and little more than three-fifths (63%) say they know whether they “pay any or all of the monthly payments.”

Employees Support Policies to Increase the Availability and Quality of Group Disability Insurance

Because employees strongly support the value of group disability insurance for all employees and for themselves personally, it is not surprising that they support policies to increase its availability and quality.

• More than three-quarters of employees (76%) say it is a good idea for employers to automatically enroll employees in a disability insurance program that these employees could decline only at the outset and annually thereafter.
• When employees are informed that small employers are least likely to offer disability insurance, a large majority (71%) favor “the federal government providing these employers a one-time tax incentive to help them create a group disability insurance option.”
• More than three-quarters (77%) favor the creation of “independent standards that were used to evaluate individual employer plans.”  Despite the ambiguity of the question – what are the standards and who creates and enforces them? – most employees said these standards are a good idea.

CONTACTS:

CFA: Jack Gillis, 202-737-0766

Unum: MC Guenther,  866-750-8686

The CFA-Unum survey was administered by Opinion Research Corp International (ORC) over three weekends in late March and early April this year by cell phone and landline.  ORC interviewed 1,191 full- and part-time employees who are broadly representative of the population of all employees, then weighted the survey data to more exactly represent the characteristics of all employees.  The margin of error of the aggregate data is +/- 3 percentage points.  Additional information about the survey methodology, and the survey data themselves, are available on request from CFA.  Also available is a CFA-Unum report on the survey data, “Employee Knowledge and Attitudes About Employer-Provided Disability Insurance.”

CFA is a non-profit association of nearly 300 consumer groups that was established in 1968 to advance the consumer interest through research, advocacy, and education.  Unum (NYSE: UNM) is a leading provider of employee benefits in the United States and the United Kingdom. In the future, the two organizations will seek to increase consumer, employee, employer, and policymaker understanding of group disability insurance through dissemination of these survey findings and related information.

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This simple question does not have a simple answer. About 1985, the author had the assignment of developing new term rates for Massachusetts Savings Bank Life Insurance (Mass SBLI), which remains an excellent source of term life insurance if available in your state: www.sbli.com. Virtually all term life sold then was Annual (or Yearly) Renewable Term – ART or YRT – in which the premium increases each year with age. ART is renewable automatically each year without evidence of insurability; in the early 1980s it was generally renewable to age 65 or 70. Since then the last renewal age for most insurers has increased to at least age 80 and often to age 95, not that you would want to renew that long. ART policies are almost always convertible without evidence of insurability to (much higher) level premium cash value policies – whole life, universal life and variable universal life – before some limiting age that varies widely, from age 65 to age 85. ART premium schedules are not guaranteed; insurers reserve the Page 2 right to increase future premiums, but not higher than contract maximums. ART buyers can reasonably assume that rate schedules will not be increased because: (1) life insurance mortality keeps improving; and, (2) increasing the premium more than the expected amount encourages those in best health to move to another insurer, leaving the original insurer with a worse, perhaps losing, block of business. The author in 25 years has not heard of any ART insurer that raised its rate schedules, but this does not mean none has taken place.

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With disability income insurance, you can avoid depleting the savings you may have accumulated for your children’s education or your retirement. This guide outlines the features and costs of individual disability income insurance and offers tips and a checklist on buying the policy right for you.

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Dear Secretary Shinseki:

The Consumer Federation of America (CFA) urges the Department of Veterans Affairs (VA) to take immediate action to protect the families of veterans from the unscrupulous payout practices of some life insurers, as described in the attached Bloomberg article, “Fallen Soldiers’ Families Denied Cash Payout as Insurers Profit.” According to the report, some of these service member families are being denied immediate access to life insurance proceeds that they should receive, while insurers retain control of these funds and collect a profit off of the interest earned on them.

The practice of life insurance companies depositing their customers’ life insurance money into their own accounts and sending “checkbooks” to these families, instead of transferring the funds that they owe directly into their bank accounts, is unfair and should be stopped. This tactic is misleading because the checkbooks do not contain live checks, even though they look very similar to live checks. They are essentially IOUs. Furthermore, because the money is deposited into insurers’ accounts, the money is not insured by the FDIC. These funds could also be unrecoverable if the insurer goes out of business. (Some life insurers are presently in serious financial shape due to significant investments in commercial mortgages and other adverse impacts from the economic situation.) Life insurers are making a tidy profit on money that should be immediately distributed to families, often without properly notifying families about what they are doing with these payouts.

While CFA applauds the decisions of the Department of Veteran Affairs and the New York State Attorney General’s Office to investigate these practices, the VA should also take immediate action to ensure that the families of deceased service members are being treated properly when a life insurance payout is due. First, I urge you to immediately remove all insurers that currently engage in this practice from your list of participating insurers. Secondly, I suggest updating the excellent booklet, “VA Life Insurance Programs for Vets and Service members” to warn veterans and service members of this scam and to urge families to get their payouts as soon as possible when a covered veteran or service member dies. By taking these small steps, the VA can help ensure that families of service members make educated decisions about life insurance policies and can protect themselves from becoming victims of this scam.

If I or the Consumer Federation of America can be of any assistance, please do not hesitate to call upon us. I served as Federal Insurance Administrator under Presidents Ford and Carter and as Texas Insurance Commissioner, so I would be more than happy to assist if you need any advice.

Yours truly,

J. Robert Hunter
Director of Insurance
(207) 864-3953

The post CFA Urges Secretary Shinseki to Take Action Against Life Insurers Denying Cash Payouts to Service Members’ Families appeared first on Consumer Federation of America.