Coughing up smoker's rates for children

May 30, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - AXA Equitable Life Insurance Co. could face a class action involving more than 100,000 policyholders who may have bought insurance policies for children, including babies, at rates reserved for smokers.

"Most logical-thinking Americans would wonder why an insurance company would assume that a child smokes," said Joseph H. "Jay" Aughtman, an attorney at Beasley Allen Crow Methvin Portis & Miles PC in Montgomery, Ala., which is the plaintiff's counsel in the case.

Smoking rates can be up to two and a half times non-smoking rates, according to industry experts.

AXA's practice came to light when an Ohio father, who now is the lead plaintiff, discovered that policies on his two children allegedly were rated based on their being smokers, even though he checked the "non-smoker" box on the application.

The policies were issued by the New York-based Equitable Life Assurance Society of the United States. AXA acquired a controlling stake in the Equitable Cos. in 1994.

According to a lawsuit filed this month in the U.S. District Court for the Southern District of New York, AXA charged smoker rates on policies covering juveniles. In addition to higher premiums, the overcharging caused these policies to pay lower dividends and interest, noted the complaint, which requested class-action status.

"Other insurance companies probably have the same practice, but we're not pursuing them at this time," said Mr. Aughtman.

AXA, for its part, has little to say about the lawsuit.

"We have just received the complaint, and at this point, we are unable to comment," said AXA spokeswoman Mary Taylor.

Some industry observers were not surprised to hear of the lawsuit.

Since insurance companies don't know whether children ultimately will be smokers - and there's no requirement that a policyholder report a post-application smoking habit to the insurer - they commonly will rate children as smokers, said Glenn Daily, a life insurance consultant in New York.

"This practice has been going on for a long time throughout the industry," Mr. Daily said. "I heard of an instance where a parent of a baby put age 'zero' on the application, and the policy was rated for a smoker."

Once an insured minor reaches the age of majority, usually 18 or 21 depending on where they live, it is up to them to inform the insurance company about whether they smoke.

"But the problem is that insurers don't send out notices asking for this information," said Jim Hunt, a life actuary with the Consumer Federation of America in Washington.

"Insurance companies must abide by the application, which becomes part of the policy, regarding tobacco usage - unless a physical exam or other evidence shows the information was incorrect," said Robert Bland, chief executive of Insure.com Inc. in Darien, Ill., an online quoting service for about 60 insurers.

The main underwriter of insurance policies for children on Insure.com does not even ask about smoking, Mr. Bland added.

"I don't think that charging all minors smoking rates is a prevalent practice," said Michael Barsky, a financial adviser with Innovative Planning Service Inc. in Woodbury, N.Y., who is a former actuary.

Even so, advisers have a duty to verify that a life insurance policy is accurately classified and rated before delivering it to the client, he said.

"Any adviser that doesn't do that is unethical," Mr. Barsky added.

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