Opinion ID: 1923690
Heading Depth: 1
Heading Rank: 2

Heading: Buyer's Guide

Text: The basic life insurance cost index is called the `Surrender Cost Index'. But the most important thing to know may be summarized quite simply: LOOK FOR POLICIES WITH LOW SURRENDER COST INDEX NUMBERS. THEY COST THE LEAST. THE MOST IMPORTANT THING TO REMEMBER WHEN USING THE SURRENDER COST INDEX IS THAT A SMALL NUMBER IS GENERALLY A BETTER BUY THAN A COMPARABLE POLICY WITH A LARGER NUMBER. (Emphasis and capital letters in original.) The trial court (Judge Sachtjen) [6] denied the request for a temporary injunction and Aetna, et al., appealed. At the time of the first appeal, the appellate court reversed the circuit court but directed the trial court to enjoin enforcement of the rule pending a trial on the merits. In its decision, the appellate court concluded that the unqualified representations that policies with low SCI numbers cost the least contained in the Buyer's Guide and Policy Summary were misleading for the court determined that it is not always true that policies with low Surrender Cost Index numbers cost the least. On the original appeal, this court, having considered Wilde's petition to review the decision of the court of appeals, vacated the decision ruling that the propositions of law addressed by the court of appeals in its opinion should not be authoritatively determined until after a hearing on the merits. However, this court did agree with the court of appeals and continued the temporary injunction, remanding the case to the circuit court directing that court to enjoin enforcement of the rule, pending a hearing on the merits. During the interim period of time between the first appeal and the subsequent remand to the circuit court, Susan M. Mitchell replaced Wilde as Commissioner of Insurance and conducted a hearing to review a possible modification of the challenged rules. Following this hearing, Mitchell directed a change in the effective date of these administrative code rules from January 1, 1979 to on or after February 1, 1980 [7] and further, made minor changes in the Buyer's Guide and Policy Summary. An example of a minor change is Mitchell's restating Wilde's earlier representations concerning the cost of policies with low SCI numbers by merely qualifying the representation with the insertion of the word likely as follows: A POLICY WITH A LOW COST SURRENDER INDEX IS LIKELY TO BE A BETTER BUY. (Emphasis supplied.) On November 20, 1979, shortly after Commissioner Mitchell ordered the language change in the Buyer's Guide and the Preliminary Policy Summary, [8] Aetna filed an amended complaint and again claimed that the amended rules were invalid for they mandate the distribution of incomplete  misleading material, contrary to sec. 628.34(1), Stats. Specifically, Aetna termed the language change by Commissioner Mitchell as merely a change without substance and reiterated that the amended rules continued to require the distribution of incomplete  misleading cost disclosure information. The basis for this allegation was that the amended Buyer's Guide and Policy Summary required to be distributed, pursuant to the administrative code rules did not provide purchasers of whole life policies with an accurate picture of the relative cost of a particular policy because they emphasized the SCI to the practical exclusion of other life insurance cost indices. Aetna, et al., claimed that two other life insurance cost indexes, namely, the Net Payment Cost Index (NPCI) [9] and the Equivalent Level Annual Dividend (ELAD) [10] must also be disclosed in order to provide the consumer with sufficient information to make an informed purchase decision. The case was tried to the court and the evidence dealing with the actuarial bases of the SCI, NPCI and ELAD, as well as that relating to the nature of whole life insurance policies, is not in dispute. Aetna, in support of their claim that the Buyer's Guide and the Policy Summary are misleading unless delivery and disclosure of the NPCI is also required before sale, established that the true cost of a whole life policy is dependent upon how it is terminated, [11] by death or surrender for cash value. The SCI and the NPCI are both measures of the relative costs of whole life policies with the SCI assuming a policy termination by surrender for cash value [12] while the NPCI is premised upon the assumption of policy termination by death. [13] At trial, Aetna, with the introduction of exhibits numbered 61 and 62, established that as a consequence of the assumption of policy surrender rather than termination by death, the use of the SCI alone cannot accurately predict the comparative costs of whole life policies when terminated by death, for the assumption that the cash value of the policy will be returned to the purchaser does not occur if the policy is terminated by death. Further, these exhibits demonstrate that in the event a policy is not surrendered, the NPCI is the more accurate measure when considering all of the elements of the policy's comparative cost [14] since, contrary to the SCI, the NPCI assumes the policy will be terminated by death and the cash value will not be available to reduce the cost of the policy. These exhibits reflected the results of studies dealing with the accuracy of the SCI in predicting the less costly of two whole life policies, assuming that each policy will be terminated by death rather than surrender ten and twenty years after issue. Each exhibit established that when termination by death is assumed, and one of two policies under consideration has a lower SCI and the other has a lower NPCI, then the policy with the lower NPCI is the less costly (or the policy with the lower SCI is the more expensive) for, as noted, the NPCI is the more accurate indicator of a policy's relative cost when it is assumed that termination will occur by death. Further, these exhibits demonstrated that as a result of their different assumptions regarding termination (death or surrender) the SCI and the NPCI often disagree as to the less costly of two policies; thus, demonstrating that the policy with the lower SCI would in fact be the more expensive policy in a substantial number of cases where termination by death occurs. Exhibit number 61 examined the relative costs of non-participating policies as to other non-participating policies in over 500 competitive pair situations. [15] This study determined that the policies with the lower SCI were not the better buy in over 220 competitive pair situations (44%) when termination by death was assumed to occur ten years after issue and in over 125 competitive pair situations (25%) when the calculations were based on a termination date of twenty years after purchase. Exhibit number 62 reflects the results of a study examining over 40,000 competitive pair situations involving both participating and non-participating policies. This study likewise concluded that the SCI alone is not an accurate and complete indicator of the better life insurance purchase in terms of return per premium dollar, as it determined that the SCI designated the wrong (more expensive) policy as the less costly in over 20% (more than 8,000) of the competitive pair situations when termination by death was assumed to occur at a ten or twenty year interval after issue. With regard to the allegation that the Buyer's Guide and Policy Summary are misleading unless the purchaser is also informed of the ELAD, the record demonstrates that: (1) the dividend offering of participating policies is an illustration based on the company's current dividend scale only and thus the dividends are not guaranteed to continue in the future at the rate illustrated; [16] (2) ELAD tells prospective purchasers the extent to which illustrated dividends or non-guaranteed values enter into the calculation of the SCI and NPCI for participating policies; (3) since the current illustrated dividends are used in calculating the SCI, this index usually favors participating policies over non-participating policies, particularly in the absence of ELAD; and (4) participating and non-participating policies competing in the same marketplace can only be accurately compared with the disclosure of the ELAD as well as the SCI and NPCI. As noted, Aetna, et al., claims that the failure to require disclosure of the ELAD with the SCI for participating policies is misleading for, in the absence of the ELAD, the Buyer's Guide and Policy Summary will fail to inform the prospective purchaser of the extent that non-guaranteed values [17] are factored into the SCI for participating policies. Given the foregoing facts relating to the relationship between the SCI, the NPCI and ELAD, the question confronting the circuit court was whether the Buyer's Guide and Policy Summary prescribed by Commissioner Mitchell would be misleading to prospective purchasers of whole life insurance due to their failure to include the NPCI and ELAD with the SCI for the policies under consideration. The salient features of the Buyer's Guide prescribed by Commissioner Mitchell are: [18] WISCONSIN BUYER'S GUIDE TO LIFE INSURANCE Office of the Commissioner of Insurance 123 West Washington Avenue Madison, Wisconsin 53702 1980 This guide has been prepared by the Wisconsin Commissioner of Insurance. This guide does not endorse any company or policy. It is designed to help most consumers buy life insurance. However, individuals with unusual financial situations should seek professional advice. BUYING LIFE INSURANCE When you buy life insurance, you should look for the least expensive policy which meets your needs. This guide will help you: Decide how much life insurance you should buy. Choose the type of policy best for you. Compare the cost of similar policies issued by different companies. FINDING A LOW COST POLICY After you decide which kind of life insurance fits your needs, look for a good buy. The best way to compare similar policies is to use the cost indexes. A POLICY WITH A LOW COST SURRENDER INDEX IS LIKELY TO BE A BETTER BUY. What are Cost Indexes? Premiums alone do not always reveal the true cost. Cost is the difference between what you pay and what you get back. Three factors affect the cost: Premiums, dividends, and cash values. Premiums are the most obvious factor in a policy's cost. You should not buy a policy unless you can afford the premiums. If the company's investment return, loss experience and expenses are favorable, a portion of your premium is returned as a dividend. Only participating policies pay dividends. When you consider buying a participating policy, you will receive a dividend illustration based on the company's current dividend scale. These future dividends are not guaranteed. Computing the cost of whole life insurance is difficult. This is because a policyholder will receive one amount of money if the policy is surrendered for its cash value and another amount if he or she dies. Usually people who buy whole life insurance policies intend to keep them but in fact many people surrender the policies early. For this reason, you should consider cash values in determining the cost of a policy. The Surrender Cost Index This index takes into account all three factors discussed above, as well as interest. The surrender cost index compares costs as if you surrendered the policy in the future and took its cash value. Before anyone sells you a life insurance policy, he or she must give you surrender cost index figures at 10 and 20 years. To see how that policy ranks, you should compare those figures with ones for similar policies from other companies. . . . To get the most reliable comparisons, keep the following rules in mind: Cost comparisons should be made only among similar policies. For example, you should avoid using the surrender cost index to compare term and whole life insurance. . . . Small differences in index numbers may be offset by other policy features or differences in the quality of service. . . . Other Useful Indexes  Life Insurance Net Payment Cost Index. This index does not take cash values into account. It is useful if your main concern is the benefits to be paid at your death. As with the surrender cost index, a policy with a lower index figure is likely to be a better buy.  The Equivalent Level Annual Dividend. This index is an average annual dividend, taking the time value of money into account. SHOPPING HINTS . . . SHOP AROUND. Policies vary substantially in cost. Before you buy a policy, check the surrender cost index. COMPARE POLICIES AND COMPANIES. The company with the lowest indexes for one policy will not necessarily have the lowest indexes for others. (Bold face type and emphasis in original.) The Policy Summary established by Commissioner Mitchell [19] requires the insurer to supply the prospective purchaser with the name and address of the issuing company, the type and name of the policy, its face amount at issue, annual premium and SCI. As to the SCI, it provides: 10 years 20 years SURRENDER COST INDEX ________ ________ To find a low cost policy, compare cost index figures, not just premiums. The Surrender Cost Index takes premiums, cash values, dividends (if any) and interest into consideration. A policy with a lower Surrender Cost Index is likely to be a better buy. Be sure you use the Surrender Cost Index to compare only similar policies. Small differences in the index are probably not significant. Large differences may mean substantial savings. See the Wisconsin Buyer's Guide to Life Insurance for examples. . . .  The Surrender Cost Index assumes that the policy is surrendered for its cash value 10 or 20 years in the future. Death prior to these surrender dates may alter the cost comparisons. Figures for participating policies are based on illustrated dividends which are not guaranteed. The Wisconsin Commissioner of Insurance requires an agent to complete this form when he or she takes an application. (Emphasis in original.) The record demonstrates that various actuarial experts disagreed concerning the issue of whether the above-quoted documents would mislead prospective purchasers of whole life policies as to their comparative costs. The Commissioner's experts testified that the Buyer's Guide and the Policy Summary were not misleading despite the fact that they only required the disclosure of the SCI and represented that policies with low SCI numbers are likely to be the better buy. They further stated that the inclusion of the ELAD and NPCI would only serve to confuse the consumer and therefore disclosure of only the SCI was reasonable. Three of the commissioner's experts stated that the representation A Policy with a low surrender cost index is likely to be a better buy, was not misleading as the word likely was a sufficient qualifier in the sense that consumers reading this phrase would not rely solely on the SCI in making their purchase decisions. One of them defined likely as meaning not always. Commissioner Mitchell, when testifying in support of her rule, reiterated the testimony of her experts and stated that the required disclosure of only the Surrender Cost Index for whole life insurance cost comparison purposes was reasonable for she believed that this index provided a simple and effective means of cost comparison not likely to confuse consumers. She further recited that the Buyer's Guide and the Policy Summary were not misleading as they represented that a policy with a low SCI is only likely to be a better buy. However, she admitted that the SCI would not always be a perfect measure of the relative cost of whole life policies, and in particular those policies retained until death. The Commissioner also testified that although the majority of the consumers who purchase whole life policies do so with the intent to hold them until death, the decision to require a disclosure of only the Surrender Cost Index was based in part on statistics showing that most whole life purchasers, despite their initial intentions, actually surrender their policies within 20 years. In contrast to the Commissioner and her experts, a number of actuarial and life insurance cost index experts testifying for Aetna, et al., recited that the Buyer's Guide and the Policy Summary as prescribed by Commissioner Mitchell were misleading. These experts stated that the repeated emphasis on the SCI in the Buyer's Guide and Policy Summary would lead average prospective purchasers to rely solely on the SCI in arriving at their purchase decisions. Thus, they concluded that the failure to require disclosure of the NPCI and ELAD is misleading because the mere reading of the SCI alone fails to provide sufficient and accurate information as to the relative cost of policies terminated by death as well as the extent to which the SCI is calculated on non-guaranteed costs (illustrated dividends). [20] They cited the admitted fact that at the time of purchase most whole life purchasers intend to hold their policies until death as the basis for their opinion that the NPCI must also be disclosed for the NPCI gives the more accurate measure of the relative costs of policies terminated by death. The circuit court entered judgment declaring Wis. Adm. Code § Ins. 2.14(3)(a) and (3)(f) and the appendices thereto (Jan., 1980) invalid insofar as applicable to whole life policies. In support of this judgment, the court agreed with Aetna that the Buyer's Guide and the Policy Summary prescribed by Commissioner Mitchell were incomplete in that they failed to also require disclosure of the NPCI and the ELAD and made the following findings of fact and conclusions of law: