Curbs on Insurance for Military Are Urged

Curbs on Insurance for Military Are Urged
By DIANA B. HENRIQUES / NY Times


In a report to be released today, the Government Accountability Office strongly urges Congress to act to protect military personnel from the deceptive sales practices and unsuitable investments and insurance policies that the report says have been a disturbing fact of military life.

The Senate Committee on Banking, Housing and Urban Affairs will examine the study at a hearing today in Washington. The report's delivery to Congress clears the way for the Senate to consider a bill that has been pending since early this year. The bill has twice passed the House with strong bipartisan support.

Senator Richard C. Shelby, Republican of Alabama and chairman of the banking panel, has said that passage of a law to protect troops from financial exploitation was a priority in the current session of Congress.

The witnesses at today's hearing will include Richard J. Hillman, the G.A.O. official who oversaw the study; Lori A. Richards, the director of compliance, inspections and examinations at the Securities and Exchange Commission; John M. Molino, deputy under secretary of defense for military community and family policy; Mary L. Schapiro, vice chairwoman of NASD; and John W. Oxendine, the Georgia insurance commissioner and the leader of a multistate investigation of military insurance sales and products.

The House bill awaiting Senate action incorporates most of the recommendations in the G.A.O. report, based on a late draft, which was obtained by The New York Times from a former federal official. People in various agencies who have reviewed the draft confirmed that it matched the final report in substance.

"The need to take definitive actions to better protect service members appears overdue," the draft report concluded. "The legislation that passed the House and is being considered in the Senate includes various provisions that, based on our work, would appear to improve the protections for military members."

Specifically, the report calls on Congress to ensure that insurance products sold to military consumers comply with state laws; to abolish a form of mutual fund sold almost exclusively to military consumers; to clarify that state insurance and federal securities regulators have jurisdiction over sales on military bases; and to direct the Defense Department to work more cooperatively with state and federal regulators.

But the agency went further, recommending that the Pentagon and state regulators work together to determine what insurance products are "appropriate and suitable" for sale to military consumers, whose financial and family circumstances are different from those of most civilians.

That recommendation is certain to generate debate at the state level, where insurance products are regulated. The insurance industry has long resisted state laws requiring agents to sell only products suitable for the customer - a standard that has long applied to the sale of securities, which are federally regulated. Some states have recently adopted such standards for the sale of annuities to the elderly, but 35 states have no suitability rules at all.

Without calling for a universal suitability standard, the agency urged that such a standard be developed and applied to the sale of insurance products to military personnel at domestic and overseas bases.

The study also offered fresh examples of dubious sales practices and raised questions about the basic design of the products that have been sold to tens of thousands of military consumers each year.

For example, investigators noted that 98 percent of service members have low-cost military life insurance. Pentagon rules impose a seven-day "cooling off" period before payroll deductions for insurance premiums go into effect for enlisted personnel, to allow time for them to seek financial counseling about buying additional insurance.

But the investigators found many instances in which the premiums were routed to the insurer through a savings bank, using paperwork that made it appear that the payroll deduction was actually for a savings account, rather than for insurance.

These and other "indications of potential fraud" were referred to the accountability office's investigators, who are coordinating their efforts with other law enforcement organizations, including Defense Department agencies and state regulators, the draft report noted.

The office's investigators also found that most insurance policies widely marketed to people in the military lapsed within three years, long before they generated any cash value for the purchasers. Indeed, 40 percent of the policies at one company lapsed in the first year - almost three times the lapse rate for similar civilian policies, the report noted.

Although these policies combine insurance with a savings fund that promises high rates of interest, the report found that "many military personnel did not benefit because any savings accumulated on these products can be used to extend the insurance coverage if service members ever stop making payments and fail to request a refund of their savings." Unfortunately, it said, many military personnel do just that.

The report said that some companies may have counted on that happening. It cited a deposition by a former insurance company executive, filed in a lawsuit against that insurer. The former executive testified that the insurer assumed that up to 75 percent of those who bought its policies would drop out by the third year and never earn anything close to the amounts promised in the marketing materials, the report stated.

The investigators also documented high lapse rates for the type of mutual fund sold to military consumers - an archaic product called a contractual plan, which requires monthly contributions over 15 years but consumes half of the first year's investment as a sales charge. The report strongly recommends that this type of mutual fund be abolished.

The report noted that federal, state and military agencies were continuing to investigate insurance and investment products and sales practices on military bases.
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