AARP presents itself as an advocacy organization for seniors and no one would deny that it vigorously lobbies Congress on behalf of seniors. But in other areas, it's sometimes a little difficult to discern just how AARP puts its members' interests first.
Take life insurance, for example. Experts say many seniors really have little need for an expensive life insurance policy, yet AARP and its partner, New York Life, write millions of dollars per year worth of term life insurance for AARP members like Debi of Foley, Mo., who recently posted to ConsumerAffairs.
"We have had a life insurance policy on my husband for $8,000. The monthly amount was $84. Since 2008, I paid it monthly. Then without notification, they increased the insurance premium due to his age of 75 to $63.87 more a month," Debi said.
Chances are the policy on Debi's husband specified that the premium increases at age 75 and, quite likely, at other pre-determined ages. This is normal for term insurance, even though Debi may have overlooked it when taking out the policy.
"Consumers think of these products as legacy products when they're really short-term security products," said Doug Heller, senior consumer advocate at Consumer Watchdog. "A lot of senior citizens don't appreciate that they are likely to be left with nothing as a result of these sales. Insurance is complicated. So when AARP gives it their stamp of approval, it just feels right. And it's often not right."
Competitive premium?
Leaving aside for a minute the question of whether Debi's husband should be paying for life insurance in the first place, let's look at that $147 rate. Is it competitive?
We went to TermForSale.com and requested a quote for a 10-year term policy for a 75-year-old non-smoker. Genworth, a highly-rated company, offered a $50,000 policy for $1,162 per year -- $113 per month -- for a preferred (meaning a non-smoker with no major health issues) policy, quite a bit less than Debi was paying.
Independent insurance agent Ed Hinerman tried a similar test. He's 58 years old and was quoted $211 per month by New York Life for an AARP plan. Using his own portfolio of companies, he found an $84 per month plan from Protective Life.
"If you’re healthy you could be paying as little as 1/3 of what New York Life wants," says Hinerman. "But our beloved AARP preys on us old folks and our parents and makes us believe that they are there for us. What a crock!"
Of course, all kinds of variables apply here. Many companies require medical testing before issuing a firm quote. New York Life doesn't require an exam for its AARP plan but it does require the applicant to provide medical information, which can affect the premium and can lead to payment disputes when the policyholder dies.
AARP did not respond to requests for comment on this article, blaming travel schedules of key staff members.
Built-in conflict
Insurance experts will tell you there is a built-in conflict when trusted non-profits get into selling insurance, travel packages and other services.
"The problem with affinity groups like AARP is that a lot of times the group is held in great trust and esteem and when the group is selling something, there's a potential conflict," said J. Robert Hunter, Director of Insurance for the Consumer Federation of America, former Texas Insurance Commissioner and former head of the national flood insurance program.
"My wife's college sent her a low-cost group life insurance plan. I went to the website and found out that if you bought it online not using the affinity, it cost less, so there was a kickback to the college," Hunter said. "These groups tend to be making significant money off these products."
Consumer Watchdog's Heller concurs: "The way insurance companies rip people off is by credentialing their product in ways that overcome the product's failing and AARP is one of the most respected marketing tools that the industry has come up with. AARP's honorable brand is really sullied by these dishonorable products."
If you have a legitimate need for a term policy, Hunter recommends shopping online, saying it's "better than having an agent in your kitchen" but stresses that most insurance comparison sites get a kickback from the policies they list. TermForSale.com is one of the few comparison sites that lists all companies, even those that don't kick back a portion of the premium, he said.
Why have it?
But the larger question is why a 75-year-old man is paying for a term life insurance policy at all.
The purpose of life insurance, after all, is to provide a certain measure of security if a family's breadwinner dies prematurely. Term insurance is often ideal for younger people of working age, during the time that they are raising children and acting as the family's primary provider.
Term insurance can be quite affordable for younger people for the simple reason that they are less likely to die, but the premiums for older people are much higher, causing many seniors to abandon their policies.
"The insurance industry knows a lot more about when you're going to die than you do," Heller said. "They price these in such a way that they get you off the policy right before you die. They know how to get you out of these policies, how to make them unsustainable."
That, in a nutshell, is why people like Debi's husband encounter drastic premium increases when they hit significant birthdays.
Besides, if one is lucky enough to make it to 75, it's likely the children are grown, the house is paid for and that the senior is collecting Social Security and perhaps pension payments that include survivor's benefits for those left behind. Rather than buying expensive insurance, personal savings can be used to cover what are euphemistically called "final" expenses -- meaning burial.
Earlier generations sometimes regarded life insurance as just that -- burial insurance. But term insurance purchased late in life is much too expensive to be used in this manner and simply amounts to, at best, a bad investment, most financial planners agree. If Debi's husband, for example, had been paying $84 per month for 10 years, he would have paid more than $10,000 for an $8,000 policy. If he died after letting the policy lapse, he would have lost that $10,000. If he died while the policy was still in force, he would have paid $2,000 more than his estate received from the insurance company.
Back in the day, there was something called an insurance "route man." This was an agent who sold relatively valueless life insurance policies to working families, then went around in person to collect the premium monthly or weekly, using the "get out there and sell something" philosophy outlined back in 1909 in the Life Insurance Independent, an insurance industry trade magazine.
Hucksters vs. professionals
This huckster's approach to the insurance business got short shrift in many industry publications in earlier times. No less a figure than the late Dr. Solomon Stephen Huebner, Emeritus Professor of Insurance at the Wharton School, wrote extensively about ethical issues in the life insurance industry.
Huebner led a movement to "professionalize" insurance sales, insisting that life insurance agents needed to view their mission as similar to that of doctors, CPAs and lawyers.
"The professional must always be aware of and protect the client’s best interests," Huebner wrote, insisting that "the practitioner should abandon the strictly selfish commercial view and ever keep in mind the advantage of the client."
AARP seems to have rejected this philosophy, using advertising to urge life insurance onto its elderly members who, in most cases, would be better off putting the money into a savings account or mutual fund or simply spending it on themselves.
This is something a reputable insurance agent would have explained to Ellen of Jackson, Mich., who posted this in June 2012:
AARP Term Life Policy - I want to cancel my policy and get the $14,000.00 that was supposed to be paid to my benefactors, who told me to cash it as they do not need the money and I needed the money. I have had this policy since 1996, paying a premium of $97.31 monthly. I was told I cannot cash this in and get my money. They want me to go to a permanent life policy of which I was told would start at payout of $2,000.00. I have paid in more than $14,000.00 over the years. So as far as I am concerned, I am out all my money. This is a scam type of insurance.
Term is temporary
Ellen obviously did not understand what she was buying back in 1996 when she apparently signed up for a $14,000 term policy that has so far cost her -- if her figures are correct -- nearly $20,000.
What Dr. Huebner would have explained to her is that a term policy is temporary -- good only for a certain term. If it's a 10-year policy, it covers you for the 10 years it's in force. If you die during that 10 years, your heirs "win" and collect the money. If you survive, you win but your heirs don't get any money, unless you renew for another 10 years -- at a higher premium -- and die before the end of that or a subsequent term.
Premiums, not surprisingly, go up sharply as you get older. A term policy that offers a "guaranteed" premium most likely does so only for the duration of the term. In most cases, it doesn't guarantee that you can renew at that rate, or at any other rate, at the end of the term. Only by reading the policy carefully -- or finding an ethical insurance agent -- can the consumer know for sure.
No residual value
So, what many consumers miss -- and what AARP and New York Life didn't bother to explain to Ellen -- is that there is no residual value in a term life policy. When the term expires, that's it. The money paid as premiums is gone. Term insurance is not a savings account, it's insurance -- and temporary insurance at that.
"Whole life," on the other hand, is insurance that has some residual value. In some cases, after you pay premiums for a defined period -- 20 or 30 years, perhaps -- the policy is paid up and you are covered for the rest of your life. Of course, you may have paid $100,000 for $50,000 worth of coverage but that's another story.
Very few reputable agents or financial advisors recommend whole life policies anymore. They are generally regarded as being not very good insurance -- and not much of an investment either. And there is no policy -- term or whole life -- that is going to be an economical purchase for someone in the 70-and-up age range.
Consumers hoping to shield their families from having to shell out thousands of dollars in funeral expenses need to plan ahead. A modest investment portfolio started in middle age and allowed to grow over time will likely provide a higher "final" payment at much lower cost than a term policy. On the cost side, arranging for a simple funeral service and perhaps donating one's body to the nearest medical school can hold down final expenses.
High hopes
Susan of Portsmouth, Va., is another consumer who had excessively high hopes for her term life policy:
My husband and I have had this insurance for five years and this is the second time the rates have gone up - this time, a whole $15.00. I suppose they will keep raising it until we can't afford it anymore and then we will cancel it. They know all about fixed incomes. If we cancel the insurance, we have nothing and will lose all the money we have put into it. They spend a ton of money on political issues. Why can't they afford to pay their claims and stop picking on seniors?
Well, we don't like to tell Susan this but unless she dies before the end of her term, she will "lose all the money" she has put into the insurance anyway. Insurance isn't savings and thinking of it that way leads consumers into making bad purchasing decisions.
If Susan's financial situation is so bleak that a $15 a month increase causes her pain, most financial advisors would say she should cancel the insurance and keep the money she is now paying for premiums. It would at least improve her standard of living a little and might enable her to save a few dollars for unforeseen expenses.
The sad truth is that many consumers of limited means will never benefit from the term insurance that they buy through organizations like AARP, simply because they are not likely to be able to afford the ever-rising premiums as they slip further into old age.
"What makes this story more interesting than your run-of-the-mill story of problematic issues of agents selling junk policies is that this is being done under the auspices of a credible organization that has earned the trust of people who, as a result, let their guard down," Doug Heller said. "Hey, it's AARP -- why would they steer me wrong?"
Good question.
AARP responds
"When lending our name to life insurance products, AARP sought to make available to its members quality products available to a wide range of individuals that would also be affordable for many members – not just the healthiest. The AARP Life Insurance Program from New York Life accepts over 80 percent of applicants—and does not require a physical or medical records.
"It’s important to note that the AARP Life Insurance Program from New York Life also provides the same standard rate structure to all who are covered. This makes the program different from those insurers with tiers of health risks who accept many applicants but accept very few at the advertised lowest rate.
"Life insurance, including term life insurance, comes in many forms, and like any other financial product, AARP encourages individuals to consider their own situation and research options before making such an important purchase. Term life insurance can be an appropriate product for older individuals depending upon a person’s individual circumstances.
"New York Life and all providers of AARP-branded products and services are required to use clear, transparent facts and information and meet customer service performance metrics, including customer satisfaction, to ensure all member needs are addressed to AARP standards."