A new variable universal life insurance lawsuit was filed in California Superior Court back in October of 2014 alleging Breach of Fiduciary Duty, Fraud, Professional Negligence, and Unjust Enrichment. Defendants listed in the lawsuit include Larson Financial Group, Larson Financial Securities, John Hancock Life, and Nationwide Life and Annuity.
The complaint tells an interesting story of Larson Financial Group’s infiltration into a professional medical association in Southern California that resulted in the sales of a handful of larger sized variable universal life insurance policies that three purchasers later regretted and for which they are now seeking damages.
The Physician’s Specialist®
Larson Financial markets itself as a financial services firm that specializes in the unique planning needs of medical professionals. The company’s web site specifically mentions their area of expertise in working with physicians, dentists, and medical residents. In fact they’ve trademarked the phrase “the physician’s specialist.”
Instead of recounting the facts of the alleged misconduct, we’ll provide you with the actual complaint filed.
Larson Financial has done an impeccable job of embedding itself in the medical market and building a reputation as a “go-to” advisory firm for medical professionals. They’ve created numerous tangential companies that seek to advise doctors for legal and tax issues, they’ve produced a book that seeks to give doctors an introduction to the financial planning pitfalls they may face throughout their professional life. They’ve also gained an endorsement from the White Coat Investor himself, Jim Dahle—appearing at the top of his financial advisors recommendations page.
Variable Universal Life Insurance Lawsuit: Legal Problem or Design Problem?
The issue brought about by the plaintiffs in this case focuses around the fact that they purchased several variable universal life insurance policies with death benefits in the many of millions of dollars and currently hold policies with practically no cash surrender value. They apparently questioned the soundness of advice to purchase such policies when first propositioned, but for reasons not disclosed in the complaint, decided to ignore those reservations and make the purchase—one of the plaintiffs even bought a second policy after raising serious concerns about affordability going forward in light of an impending divorce.
Based on the information disclosed in the complaint, I can say with a great degree of certainty that these policies were not implemented in a way that sought to maximize cash values. The stated death benefits alone would require significant premiums in order to be funded at an appropriate level for cash accumulation.
In fact, I’ve taken the liberty of running illustrations with John Hancock’s and Nationwide’s current variable universal life policies assuming $180,000 annual premiums (the total that one of the plaintiffs was at by the time she purchased all policies) designed for maximum policy cash value performance. The death benefit needed to keep these policies qualified as life insurance is nearly half of the death benefit the plaintiffs ended up with.
Disclosure:Variable universal life insurance is a security. We do not sell variable universal life insurance nor do we offer advice regarding securities of any kind. The illustrations being discussed are just that–illustrations.
This is based off John Hancock’s Accumulation VUL 2014 and Nationwide’s YourLife® Accumulation VUL. I’m well aware of the fact that these products were not likely the products originally purchased by the plaintiffs, but there have been virtually no changes to mortality assumptions within this time period and the required death benefits to remain compliant with the Modified Endowment Contract and 7702 Test would not be anywhere near 100% different.
Further it’s worth noting that these policies have several hundred thousand dollars in cash surrender value by year 3 (roughly where the plaintiffs would be after purchasing their first policies). This is a big difference from zero cash after a couple years as stated in the complaint.
Legal Issues at Hand
There are, as we stated four charges against the defendants in this case:
- Breach of Fiduciary Duty
- Professional Negligence
- Unjust Enrichment
Breach of Fiduciary Duty is directed at Larson Financial for failing to act as a reasonably prudent financial advisor in recommending the insurance policies to the three different plaintiffs.
I understand where a layperson would agree with this one. However, in most cases, insurance products do not fall under the scope of products a financial advisor can advise in the same capacity he or she can advise to buy various stocks, bonds, or mutual funds or how to allocate an investment portfolio that includes various assets.
Many states have ruled that insurance advice is a separate line of business altogether–requiring separate licensing. Further complicating the situation is the fact that variable universal life insurance is the product in question. Since it technically falls under FINRA and SEC jurisdiction, it’s classified as an investment, which does potentially make it subject to fiduciary rule.
Not to dive too deeply into the weeds on this one, but even within the investment industry, there is some question of when a financial advisor is acting as a financial advisor, and when a financial advisor is acting as a broker for investment products. Larson Financial’s ability to produce evidence that they disclosed the difference between these roles could save them from this charge.
Fraud is also aimed at Larson Financial for allegedly concealing facts and misrepresenting the variable universal life insurance policies to the plaintiffs. There is also a mention of failing to uphold their fiduciary duty because of this concealment or omission of facts.
The fiduciary claim is debatable, but if the plaintiffs can prove that they truly did not receive disclosures on fees and various policy aspects, then Larson Financial could be in a fair amount of trouble.
It’s almost unimaginable that this would be the case as the paperwork involved in a variable universal life insurance sales is quite substantial and littered with disclosure. Those of us in the industry also know that policy proposals (aka illustrations) would all include at least surrender charges and many variable life proposals also include the calculation for mortality expenses.
Professional Negligence is aimed at all defendants and claims John Hancock and Nationwide owed the plaintiffs a duty of due care to not offer them insurance policies that were not suitable. This one will be interesting if this case goes to trial.
It could be the case that both insurers will look to Larson Financial for the representations made regarding the applicants. But at the same time it could tighten some insurers willingness to issue various amount of life insurance on individuals if it turns out both insurers merely used a multiple of income that was deemed appropriate.
For Larson, it comes back to making a recommendation to purchase life insurance that the plaintiffs claim they did not need and that they (the plaintiffs) therefore incurred unnecessary losses due to expense of owning life insurance.
Unjust Enrichment is aimed at John Hancock and Nationwide for receiving premiums for policies the plaintiffs claim should have never been offered to them and now imposing surrender charges on those policies that essentially causes them to lose all premiums paid to date.
While many of us could certainly argue the merits of such a claim, we also can’t ignore that fact that the plaintiffs had life insurance for the last several years. While I certainly agree they paid a lot for that life insurance, as someone who has been down this road before I speak from experience that in the eyes of the law in other states, buying the policy and having the death benefit is considered a reasonable transfer of value.
I’m going to preface the following by noting that if it turns out that allegations made by the plaintiffs are true then I fully agree that Larson Financial committed gross misconduct—John Hancock and Nationwide probably not. I find the alleged behavior deplorable.
But there is a certain degree of personal responsibility that one must assume over his or her life and that goes both ways here.
I believe there were better ways to implement these life insurance products—if they should have been suggested at all—I do note the underwriting involved in such a death benefit size and also the financial commitment required in these three cases.
If the plaintiffs were unsure about the recommendations, the magnitude of the premium commitment and the financial disclosure through underwriting that would have been necessary should have prompted seeking out a second opinion—this has happened in cases we work on of similar and even smaller size. We invite people to scrutinize and ask as many questions as they feel necessary to feel comfortable before purchasing a policy.
It is possible that Larson truly did conceal much of the process and the material facts of the policy—anything is possible. But barring that reality, there is some responsibility that one must take when making decisions as serious as these.
And while Larson deserves a great degree of reprimand for the bad implementation of the policies, I’m not yet convinced that much of what was disclosed in the complaint speaks to legal infractions. Time will tell as more facts become available, and this one will be interesting to watch as it unfolds.