Deceptive Sales Practices in the Life Insurance Business

Abstract

The purposes of this paper are to describe a variety of sales practices used in the life insurance business and to suggest ways in which such practices might be modified so as to eliminate the element of deception. All of the practices discussed in the paper involve numbers, and also utilize improper statements about either the price of life insurance protection or the rate of return on the savings element of a cash-value life insurance contract. The conclusion is that the widespread use of such practices constitutes a national scandal, and that the entire subject should be examined carefully by those interested in the welfare of the life insurance business. The marketing of individual life insurance is characterized by a variety of sales practices. The purposes of this paper are to describe some of these practices and to suggest ways in which they might be modified so as to remove the element of deception. At the outset, it is appropriate to explain the way in which the word deceptive is used in this paper. A presentation is if it tends to give the recipient an erroneous impression of important relationships. The emphasis in this definition is on the recipient. When a life insurance advertisement or sales presentation is described in this paper as deceptive, it is not intended to suggest that the deception is necessarily deliberate on the part of the life insurance company or agent. For the purposes of this paper, the various practices are divided into three categories. Class A practices are those that apply to a single policy year and involve a misallocation of the interest factor. Class B practices are those that apply to a period of Joseph M. Belth, Ph.D., is Professor of Insurance in the Graduate School of Business at Indiana University. He is author of Participating Life Insurance Sold by Stock Companies (1965), for which he received the 1966 Elizur Wright Award, The Retail Price Structure in American Life Insurance (1966), and Life Insurance: A Consumer's Handbook (1973). Dr. Belth is president of the American Risk and Insurance Association. The author acknowledges the contributions of several persons who read and commented upon a draft of this paper. The author also acknowledges receipt of a $500 research grant from the American Risk and Insurance Association; the funds were used to defray certain direct expenses associated with the preparation of the paper. The author alone, however, assumes full responsibility for the views expressed in the paper and for any errors that may remain.