Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, May 9, 1994 TAG: 9405100027
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: By MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Albert C. Schmick of Union Hall has offered his story as a cautionary tale for other people who might be relying on an insurance company and the Virginia Life, Accident & Sickness Insurance Guaranty Association for the safety of their nest eggs.
He is especially eager to share his experiences with people who had annuities with Mutual Security Life Insurance Co. of Indiana or any other bankrupt insurance company.
Schmick's odyssey began in 1985 when he sold his business and decided to salt away $100,000 in an annuity he could tap into in case of an emergency. He had no company pension. And, like many people, he knew little about annuities.
An insurance agent he knew sold him a policy with Mutual Security Life, telling Schmick the company was highly rated.
It offered a guaranteed 11 percent return for seven years and carried only a two-year penalty period for early withdrawals. Shmick concedes that those too-good-to-be-true claims should have rung a warning bell, but "I didn't know that was unusual."
The insurance agent tipped him in early 1992 that the company was in serious financial trouble and facing liquidation. The agent advised him to annuitize the policy, which means taking the monthly benefits.
Schmick was reluctant. "I wanted to hold it back to be an emergency fund I wouldn't touch unless I needed it badly," Schmick said. Besides, he would lose the last guaranteed year at 11 percent. But the agent told him "this was the safest way to assure full protection of the entire amount of what would be owed me under the Virginia Guaranty Association," an insurance industry-supported safety net.
With a limited time to act, Schmick, who is now 65, signed a contract in March 1992 to take monthly payments. Had he not done this, he faced the possibility that his policy could have been frozen.
The contract by that time had a value of $189,772. It called for 84 monthly payments of $2,920. His agent twice assured him by letter that insurance contracts are covered by the Virginia Guaranty Association up to $300,000.
He received 13 payments while Mutual Security went into liquidation and its assets were assumed by Mega Life and Health Insurance Co.
In April 1993, he received a new contract from Mega reducing the monthly payments by nearly $1,300 to $1,656 over a period of 60 months instead of 84 months. It also reduced the interest rate on the unpaid balance from 8.1 percent to 3 percent.
Schmick held the lower checks instead of cashing them, a luxury that others might not be able to afford. When repeated contacts with the Virginia Guaranty Association produced no results, he retained a lawyer to pursue his claim under the fund that is supposed to protect Virginia citizens from insurance company defaults.
His lawyer persuaded the guaranty association to pay the claim, but that cost Schmick more than $5,000 in legal fees. The association made a lump-sum payment to Mega, which caught up the back payments and reinstated the originial contract terms.
Schmick said he's telling his story because he believes few people are aware of the guaranty association and the protection it can afford.
"I have good reason to believe that there may have been a significant number of Mutual Security Life contract holders who were caught in curcumstances similar to mine," Schmick said. Some, he said, may not have been willing or able to "go to the length and expense that I did." Perhaps some didn't know how to begin such a process, accepting reduced benefits as better than nothing.
The same lesson would also apply to policyholders of other defunct insurance companies.
Schmick's advice is for such people to retain a lawyer to pursue the matter because he made no progress in his fight on his own.
John O'Mahoney, a spokesman for Mega Insurance in Oklahoma City, said the reduction in benefits was authorized by the Indiana court handling the liquidation of Mutual Security. Mega, he said, merely administers the assets left by Mutual Security, and policyholder benefits were reduced to the level of the company's assets.
O'Mahoney said Mega has become the conduit for the higher benefits financed for Schmick by the Virginia Guaranty Association.
David McMahon, chairman of the Virginia Guaranty Association, said a few other claims are pending from Mutual Security policyholders.
Since July 1993, he said, the law has been "clarified" to limit claims under annuity benefits to $100,000. That means Schmick no longer would be protected under the new rules, but his claim predated the change in the law.
McMahon and Schmick agree that his claim hinged on an interpretation of the law whether the $100,000 or $300,000 ceiling would apply. In his case, the association agreed with Schmick's lawyer that the $300,000 in coverage was available to him at that time.
McMahon said the state offers no coverage at all for variable life and variable annuity policies, for insurance sponsored by fraternal organizations, or for burial societies.
There is still a $300,000 limit for life and health policies and for an aggregate of policies.
McMahon suggested that people should diversify their insurance and annuity coverage so that no more than $100,000 is invested in a single company. It is similar, he said, to limiting deposits in one bank to $100,000 because of limits on federal deposit insurance.
The guaranty fund is supported by a fee on Virginia insurance companies of 2 percent of premiums. Thus, McMahon said, healthy companies are taxed to support those that fail. Often, he said, these failing companies offer unrealistically high interest that attracts business away from healthy companies.
This boosts the costs of healthy companies and, by extension, their customers.
It also raises questions of fairness, he pointed out. People should check their insurance and annuity companies to determine if they are sound. It's the old story about exaggerated promises, he said.
The guaranty association also is hampered by the fact that failing companies often keep poor records and lay off workers, McMahon said. And these records are usually in a distant state.
McMahon said the pending cases are under investigation. "We're trying to do what we can in the real world," he said.
Schmick said that Virginia law bars insurance agents from using the existence of the guaranty association as a selling tool. He thinks the law should be changed.
"It is my understanding that some states print an information folder of some type that explains the basics of the protection offered by their guaranty association, and that it is required that people contracting for insurance products must be given one of them before they make a commitment," Schmick said.
"It seems at the very least, this is something Virginia should require."
by CNB