Weiss' Recommendations to Prudential Policyholders

Summary of Weiss' Recommendations to
Policyholders Involved in the Class Action Settlement With
Prudential Insurance Company of America
Attachment to Weiss Ratings' News Release: May 2, 1997

If you feel that you were misled by your Prudential insurance agent, then you should undoubtedly pursue relief under the Alternative Dispute Resolution Process. Without going to the expense of filing your own lawsuit, this is the only way you will recoup the money you feel you were cheated out of.

If you do not feel you were misled or you could not substantiate a claim that you were misled, Prudential is offering several alternatives under the Basic Claim Relief option. They are the Optional Premium Loan, Enhanced Value Policy, Enhanced Value Annuity and Mutual Fund Enhancement.

Much of the detailed information you need to make an informed purchasing decision is not included in the information Prudential has provided you. However, if you elect the Basic Claim Relief you are not obligated to actually purchase any of the products until you do have the necessary detailed information. But keep in mind that once you choose the Basic Claim Relief on your Election Form, you have completely forfeited your right to participate in the class action settlement.

Weiss' recommendations for each option:

Optional Premium Loan - If your financial situation is such that you absolutely need a loan to continue paying your policy premiums, Prudential is offering a variable rate to borrow the money. Otherwise, do not get the loan.

1. Enhanced Value Policy - Since, under the Remediation Plan, this policy cannot be a replacement for your existing policy, only consider purchasing it if you feel that the death benefit of your current policy is insufficient to support your beneficiary's needs. If you do need additional coverage, only consider this policy in the context of several other alternatives, such as whole life policies from other companies or term policies.
   
   
2. Enhanced Value Annuity - The information provided in Prudential's materials is, in no way, sufficient to make an educated decision about this product. Too many factors are involved in your selection of an annuity, such as the crediting rate, your tax bracket, and whether the annuity has a life insurance feature. If you are in the market for an annuity, review this one in the same way you would review the annuity products of any other company, and consider the "enhancements" as fringe benefits.
   
   
3. Mutual Fund Enhancement - As with the other options, the value of this product must stand on its own merits next to comparable mutual funds. The "enhancement" should only be considered in the decision if you are considered another that appears to be close to identical.

The Report

In November 1996, 43 states adopted a policyholder Remediation Plan designed to compensate more than ten million policyholders of Prudential Insurance Company of America who may have been the victims of misleading sales practices. After some modification, the Remediation Plan has since been adopted by all 50 states, and Prudential has agreed to pay out a minimum of $410 million. If you purchased a life insurance policy with Prudential between January 1, 1982 and December 31, 1995, the deadline is fast approaching to make a decision regarding participation in the Remediation Plan. You have two choices:

1. Alternative Dispute Resolution Process (ADR)

To select to participate in this process, you have to file a claim in which you will explain in what manner you felt you were misled. You can include any supporting documentation you might have, but you don't have to provide it in order to file the claim. If you don't have any supporting documentation for the claim and it's just your word against theirs, they may go by the number of claims against a particular agent indicating the likelihood that you are telling the truth.

You may have been misled in one of several ways. Did your agent do any of the following?

• convince you to buy a new policy with the cash value of an existing policy?
  
• 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?
  
• make you think you were purchasing an investment product rather than a life insurance policy?
  
• mislead you in some way other than the three above?
  

If you feel that your claim is valid, you will receive a share of the money that's awarded in the Class Action Settlement dependent upon how you were misled. For example, if you were convinced to use part or all of your cash value in one policy to purchase another one, you may get that money back with interest. How much you receive will depend on how many valid claims are filed. The average amount has been quoted as approximately $2,300 before taxes, but there's no way to know precisely.

2. Basic Claim Relief

You do NOT have to prove that you were misled to choose the Basic Claim Relief. The options you are eligible for under the Basic Claim Relief are listed on your Election Claim Form. Below is a description and recommendation of all four options:

Option #1. Optional Premium Loan

Under the 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 is the time to do it. Prudential is offering very variable rates -- better than you will get on regular policy loans or through other avenues such as home equity loans. The only drawback is that you must agree to use the policy's dividends to buy additional insurance rather than letting them accumulate as cash value.

Option #2. Enhanced Value Policy

With this option, Prudential is merely allowing you to purchase a new whole life insurance policy through which they will purchase additional 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 amounting to

• 50 percent of your first annual premium in the first year
• 25 percent of your first annual premium in the third year
• 25 percent of your first annual premium in the fifth year
• 15 percent of your first annual premium in the seventh year (assuming the settlement is upheld under appeal)

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: First you should ask yourself: Do I really need another life insurance policy? Don't even consider purchasing this enhanced policy unless your answer is yes. In other words, if the death benefit on your current policy is high enough to meet your beneficiary's needs -- usually six to eight times your annual income if you have dependents that must be supported in the future, much less if you just want to cover finite expenses -- you don't need more insurance.

This is not a deal too good to pass up!

If you do think you need more insurance, it's worth considering. However, you can probably find much better alternatives to a whole life policy. For instance, you could purchase a much cheaper term policy and then invest the difference in premium in something that will more likely yield a higher return than the savings vehicle combined with the whole life policy. 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.

Option #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, dependent upon the face value of your original policy. You will be offered either a fixed or variable annuity.

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 is highly dependent upon the crediting rate being offered, your tax bracket, and whether or not the annuity has a life insurance feature. You must compare the return on the annuity with the return you could earn from investing in another instrument, such as stocks. And remember that annuities typically have many more fees than other investments, like mutual funds, and they also have surrender charges that apply if you want to cancel the contract within a certain number of years, usually seven.

In general, the annuity is only beneficial if your tax rate (the amount you would save by not having to pay taxes annually) is high enough to offset the lower yield. In other words, if you compare a mutual fund that stands alone versus a mirror of that same mutual fund that is wrapped in an annuity, the stand-alone mutual fund yields a higher return because annuities typically have many more fees, especially if there is a life insurance feature.

Option #4. Mutual Fund Enhancement

This option 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 one of Prudential's mutual funds and the company will enhance part of the initial purchase by 4%.

However, this enhancement is subject to certain limits based on the face amount of your original policy. For example, if the face amount of your original policy was less than $100,000, the maximum amount of your initial payment that is subject to enhancement is $10,000. So if the face amount of your original policy was $75,000, and you want to invest $15,000 in the mutual fund offered by Prudential, the most enhancement you will receive is $400 -- 4% of $10,000 -- which is really only 2.7% of your initial payment. But if the face amount of your original policy was $200,000 and you want to invest $15,000 in the mutual fund, you will receive a full 4% enhancement on the $15,000 investment.

Recommendation. If the fund Prudential offers you has performed well historically, has had little or no sales commissions and you would be interested in purchasing 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.

Very Important Note: The Enhanced Value Policy, Enhanced Value Annuity or Mutual Fund Enhancement are not replacements for your original policy. You cannot use money from an existing Prudential product to purchase one of these enhanced products.