Independent Broker Dealer Consortium

Universal Life Insurance Saga


I am sure that most of you saw the article in the Wall Street Journal, Insurance Policies Backfire on Retirees, which chronicled the experiences of several retirees who purchased universal life insurance policies 20, 30 and up to 40 years ago.

Sold as an annually renewable term policy with a tax-deferred savings account linked to the policy, the policies were designed so that the cash value of the savings account would offset part of the annual term life insurance premium.   This strategy worked well, as long as interest rates in effect 20 to 40 years ago remained in the 10% to 13% range. In an environment of high interest rates, very little attention was given to the inevitable worst case scenario; a prolonged period of low interest rates and extended life expectancy, resulting in an increase in the premiums for the term life insurance component of a universal life insurance policy, in some cases by 300%.

Many retirees are faced with exorbitant premium payments and in many cases need to make the decision whether to continue to pay the insurance premium, reduce the amount of the insurance or let the policy lapse.

Experts in the industry are bracing for the floodgates of litigation arising out of the sale of these products to open.  In speaking with several of these experts, they all agreed that a claim for negligence against the agent may be a difficult hurdle to overcome provided that the agent and the insurance company:

  1. Maintained good records regarding the sale of the universal life insurance product, demonstrating that the clients were provided with information about the way the policy operated and that the clients signed off on having received the documentation;
  2. The product marketing material clearly stated the risks of purchasing a universal life insurance policy, i.e., decrease in the interest rates which would impact the interest earned on the funds in the tax-deferred savings account;
  3. The agent did not recommend that a client sell a whole life insurance policy in order to purchase the universal life insurance policy;
  4. The insurance company sends out statements regularly; monthly, semi-annually or annually, about the cash value in the tax-deferred savings account and the cost to maintain the term life insurance;
  5. The insurance agent is available to discuss options that may be available to the client when faced with increased premiums to maintain the universal insurance policy.

Some attorneys who defend agents and insurance companies believe that a statute of limitations defense may operate to dismiss claims arising out of the sale of Universal Life insurance polices more than 6 years ago.  However, a motion to dismiss is decided by the Court and it has been the experience of many that Courts are reluctant to dismiss claims especially when the claimants are elderly and are confused about the insurance policy at issue.  Many jurisdictions will apply the discovery standard when deciding on a motion to dismiss based on a statute of limitations defense. In other words, when did the plaintiffs discover that they had a potential cause of action concerning the insurance policy at issue.

So, what is an agent to do when faced with the task of advising their client on the best course of action concerning a universal life insurance policy?

  1. Communicate with the client.  Full transparency and full accessibility to the agent are keys to maintaining a working relationship with the client.  Review the policy purchased and the options available to the client, such as a reduction in the face amount of the life insurance policy;
  2. If a client threatens to sue an agent or the insurance company for the increase in premiums for a universal life insurance policy, immediately contact your company’s legal department or compliance department.  Maintain all records concerning the sale of the policy and your meetings and conversations with the client.
  3. If an agent advised a client to terminate a whole life insurance policy in order to purchase a universal life insurance policy, the agent must have documentation to support this advice.  The defense counsel and experts I have spoken with are all in agreement that this would be a worst case scenario for the agent. Plaintiff’s counsel will attempt to establish that this course of action was purely for the benefit of the agent as the agent would have earned a generous commission on the sale of the universal life insurance policy.

The takeaway here is, if the agent has good documentation regarding the sale of the universal life insurance policies, the client was receiving regular statements about the increase in premiums to maintain the policies and the balance in the tax-deferred savings account and the agent maintains an open and transparent and responsive relationship with the client, it would be easier to defend the agent in the event a client commences an action.

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