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What Consumers Should Do About The Class Action Settlement Against Prudential

A Free Report From Weiss Ratings, Inc. by Melissa Gannon and Martin Weiss

Did you purchase an insurance policy from Prudential Insurance Company of America between January 1, 1982 and December 31, 1995? Do you feel you may have been a victim of misleading sales practices by Prudential or its agents during that period? If so, you need to act quickly. Prudential has agreed to pay out a minimum of $410 million to compensate policyholders. But the deadline for applying is fast approaching -- June 1, 1997; and once that deadline is passed, you will have waived your rights to participate in the settlement.

By now, you should have received the information on this plan from Prudential, entitled "Answers to Questions You May Have About The Policyholder Remediation Plan." If not, or you don't have it handy, you can get another copy by calling the Claimant Support Team at 800-736-8913.

An estimated 10 million people may have been victims over the 14-year period. So naturally, Prudential is trying to limit its damages. To lure you away from participating, the company is offering you the "carrot" of supposedly enhanced insurance products.

You have two basic choices: You can either (a) sign on to the settlement now or (b) request information on the enhanced policies. These choices are mutually exclusive. If you decide to join in the settlement, Prudential won't sell you the enhanced policies. Likewise, if you decide you want information on the new policies, you will waive your rights to any compensation from Prudential.

However, in its mailing to policyholders, Prudential excludes much of the information you will need to make an informed decision. As a result, it is impossible for you to know the true tradeoff between your two options -- participating in the settlement or purchasing an "enhanced" product. You could call the independent Claimant Support Team we mentioned earlier. But when we called, we did not get any clarification on this issue. They simply told us that you can get that information only after you've made a choice.

Why We Wrote This Report

The purpose of this report is to help you make a more informed choice. Our company, Weiss Ratings, is in the business of independently rating insurance companies, and we have no ax to grind -- for or against the companies.

All other insurance rating agencies receive substantial fees from the companies they rate. Weiss Ratings is the only one among the rating agencies that receives no compensation from the companies, deriving its revenue strictly from the sale of its ratings to consumers and businesses. Further, most other agencies grant rated companies the right to preview their ratings before they are published and to suppress the publication, if unfavorable. Weiss publishes all ratings -- good or bad -- with no suppression allowed.

This report is written with a similar philosophy: Our goal is to provide you with objective, third-party advice which will maximize your chances of making the right choice.

Here Are Some Simple Steps To Follow

  • Step 1. Try to determine if you were misled by Prudential's sales practices in the 14-year period between January 1, 1982 and December 31, 1995. This may have occurred in several ways: The sales agents may have tried to convince you to buy a new policy using the cash value of an existing policy. They may have lead you to believe that, in a short period of time, your policy dividend would be high enough to pay your policy premiums for you. Or they may have given you the impression that you were purchasing an investment product rather than a life insurance policy.
  • Step 2. If you feel you were misled along these lines -- or in any other way -- you should seriously consider participating in the settlement . Simply check the option "ADR Process" on your Election Form. Even if you are unsure, or you feel you do not have strong evidence to back your claim, you probably should select this option or you will be waiving your rights to participate in any settlement. Later, after you've selected to participate in the settlement, you will receive claim forms in which you will have an opportunity to explain how you feel you were misled. You can include any supporting documentation you might have, but you don't have to have this documentation in order to file the claim.
  • Step 3. If you are reasonably sure that you have never been deceived by Prudential or its agents, you should request further information on the "enhanced value" policies offered by Prudential. Check "Basic Claim Relief" on the Election Form. You will NOT have to prove that you were misled to choose the Basic Claim Relief. Also, you are not necessarily eligible for all the options under the Basic Claim Relief, but those you are eligible for are listed on your Election Form.
  • Step 4. When considering the "enhanced" products offered, ask yourself these questions: Do I really need any more insurance? Is this truly a better deal than what I can receive from a competing company? Can I get equivalent insurance from a higher-rated company? Here is a description and recommendation of each of the four products Prudential is offering in the Remediation Plan:

Product #1. Optional Premium Loan. The cash value of your whole life insurance policy is used as collateral for a loan that can only be used to pay the premiums on your policy. You will receive a favorable interest rate equal to Prudential's short-term cost of borrowing which, in January 1997, was 5.66%.

The loan must be repaid in annual installments over two to six years, depending upon the loan you obtain. If you do not repay the loan, it will be repaid by borrowing through a normal policy loan, which will carry a much higher interest rate.

Recommendation: If you feel that you must borrow money in order to maintain your policy, then this may be the time to do it. Prudential appears to be offering competitive rates -- certainly better than those you will get on regular policy loans or through other avenues such as home equity loans. The primary drawback is that you must agree to use the policy's dividends to buy additional insurance rather than letting them accumulate as cash value.

Product #2. Enhanced Value Policy. With this option, you will be purchasing a new whole life insurance policy through which Prudential will purchase still more insurance for you. Once you have paid a full annual premium -- either in one payment or semi-annual, quarterly or monthly payments -- Prudential will buy additional life insurance coverage.

The policy will still be underwritten, which means you will have to go through medical testing, but Prudential claims it will be less rigorous than the regular underwriting process.

Recommendation: Don't consider purchasing this enhanced policy unless you feel that you need more life insurance. If the death benefit on your current policy is high enough to meet your beneficiary's needs, you don't need more insurance. (Typically, the beneficiary's needs are six to eight times your annual income if you have dependents and much less if you just want to cover finite expenses.) Bottom line: This is NOT a deal that's "too good to pass up."

If you do think you need more insurance, however, it's worth considering. But you should also consider alternatives to a whole life policy. For instance, you could purchase a much cheaper term policy. You could then invest the premium difference in another savings vehicle. You should only buy this enhanced policy if you think the annual premium is comparable to what you would pay at another company, and then consider the enhanced portion a fringe benefit.

Product #3. Enhanced Value Annuity. This is a deferred annuity that you can purchase, and at the end of each of the first and second years, Prudential will contribute 2% of your initial payment to the annuity up to a maximum amount.

However, Prudential's materials describing the Remediation Plan do not tell you if the annuity will have any life insurance features such as a 10-year certain payout -- a common feature which means an annuity will be paid for a minimum of 10 years whether to you or your beneficiary.

Recommendation: Whether or not you should purchase this annuity depends heavily upon the "crediting rate" (yield) being offered, your tax bracket, and whether or not the annuity has a life insurance feature. Before you buy it, make sure you compare the return on the annuity with the return you could earn from investing in other instruments, such as stocks and bonds. And remember that annuities typically involve more fees than most other investments, plus surrender charges if you cancel the contract prematurely -- typically within 7 years or so.

Product #4. Mutual Fund Enhancement. This product will not be available until the Class Action Settlement, which was approved on March 7, 1997, is upheld on appeal by the federal courts. Under this option, you can purchase shares in one of Prudential's mutual funds and the company will essentially chip in an additional 4% over and above your purchase. However, this enhancement is subject to certain limits based on the face amount of your original policy. Recommendation: If the fund Prudential offers you has performed well historically, has little or no sales commissions, and you would be interested in purchasing it anyway, then go ahead and take advantage of the enhancement. Otherwise, the enhancement is not a good enough deal on its own merits and probably would not offset high fees or a poor yield.

Prudential Insurance Company of America is Rated B-

Weiss Ratings has never included Prudential among its recommended companies (those rated "B+" or better); and it currently gives Prudential a "B-" rating due to its exposure to junk bonds and mortgages, and due to operating losses in recent years.

A "B" rating is not bad. It means the company offers good financial security and has the resources to deal with a variety of adverse economic conditions. However, in the event of a severe recession or major financial crisis, we feel that this assessment should be reviewed to make sure that the firm is still maintaining adequate financial strength. The minus sign in the rating is in an indication that, with new data, it is possible that the company could be downgraded.

We feel it is especially important to consider the rating if you are going to buy the fixed annuity or whole life insurance policy offered in Prudential's Remediation Plan. It is somewhat less critical if you are intending to purchase a variable annuity. To compare Prudential's rating to that of other insurers, you may obtain a rating on any company from Weiss Ratings, by calling 1-800-289-9222. The cost for a rating over the phone is $15 per company; and for a one-page Personal Safety Brief, $25.

America's Consumer Advocate for Financial Safety
Weiss Ratings, Inc.
4176 Burns Road
Palm Beach Gardens, FL 33410
800-289-9222

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