Variable Universal Life Insurance Sales Misconduct
VARIABLE LIFE INSURANCE
You might wonder why lawyers who represent investors in disputes against stockbrokers would be writing about life insurance. Most people are unaware that certain life insurance products are actually securities and can only be sold by agents who hold a special type of broker’s license. In fact, we are seeing more and more cases of bad brokers turning to insurance products as a way to boost their sagging income. People often don’t realize that an insurance agent can be sued for sales abuses. But in fact, such agents are held to many of the standards applicable to conventional stockbrokers.
The prevalence of insurance products that function like securities has turned the process of dealing with life insurance agents into something akin to a walk in a minefield. Buying life insurance used to just be stressful and confusing. But these days, it actually can threaten your financial health. Insurance companies and their agents rarely tell the whole truth when selling policies. They might represent life insurance to be a retirement plan, or promise customers that premiums eventually will vanish thanks to the policy’s investment returns. They might engage in unfair comparisons in order to have policyholders needlessly cash in current policies to buy new policies, a sales abuse called “twisting” or “churning.” Or they might sell a policy they know or should know will be a money pit — a policy that will lapse in the near future as premiums unexpectedly increase.
At Hermann, Cahn & Schneider, our attorneys handle cases related to each of these different types of insurance sales practices. But one big problem area we’re seeing now involves a product that actually can encompass all of these abuses. It’s a controversial type of life insurance called “variable universal life” or “universal variable life.” We call it VUL for short. But many policyholders end up calling it things we’d rather not print here.
What is Variable Universal Life Insurance?
In a variable universal life policy, unlike a traditional whole life policy, the cash value fluctuates upward or downward — hence the term “variable.” The policyholder invests money — “premiums”– in his or her choice of sub-accounts offered by the insurance company. These sub-accounts, which are like mutual funds, vary from one another in terms of type and risk.
Many variable universal life purchasers are led to believe, usually with the aid of misleading illustrations regarding potential future returns, that their cash value will rise dramatically. In fact, some purchasers are even persuaded that they eventually will be able to stop paying premiums because the ever-increasing cash value will itself be sufficient to sustain the coverage. Unfortunately, agents rarely explain to their customers that unless the policy is adequately funded from the outset, it probably will fail, perhaps at great cost to the policyholder.
Why would a Variable Universal Life policy fail?
The vast majority of policyholders put their premium dollars in sub-accounts invested in stocks, usually at the suggestion of the agent. These sub-accounts are volatile, and when cash value drops because of downward movement in the stock market, the policyholder must add money in order to keep the policy in effect. Premiums which the owner thought had vanished forever might suddenly reappear. And premiums the owner had been paying will increase, sometimes to a shocking degree. The policy can become so expensive that the policyholder simply can’t afford to make the premium payments any longer. To compound the hardship of lost fees and expenses that can’t be recouped, the policyholder may have been persuaded by the agent to surrender or borrow against other insurance policies in order to fund the variable universal life policy. Now those original policies will have been lost as well.
You might think that these problems can be avoided by choosing safe fixed-income sub-accounts that have a low return but no volatility. You would be wrong. When a variable universal life policy isn’t adequately funded from the outset, a low return on invested premiums will hasten the policy’s failure. The cost of insurance in a variable universal life policy is so high that inadequate growth of the cash value will result in increased premiums. Consequently, policyholders who choose conservative sub-accounts often will end up in the same fix as those who choose riskier sub-accounts.
Don’t insurance companies care if their products fail?
Logically, one would ask why insurance companies and their agents, knowing that so many of these policies are doomed to fail, would continue to sell VULs. One would also ask why these companies and their agents don’t disclose the problems to buyers at the time of sale. The answer is simple. Commissions and fees earned on a variable universal life policy, especially in the first year of the policy’s existence, typically are enormous. The profit motive overrides all other considerations for insurers and many insurance agents.
If you believe you may have been a victim of misrepresentations or inadequate disclosures regarding the sale of a variable life insurance policy, please contact us for a free consultation. We will determine whether you have a right to seek compensation from the insurance agent or his company. If so, we may be able to help.