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In August of this year, two California residents filed a lawsuit against the Pacific Life Insurance Company alleging:
- Violation of Unfair Competition Law Business and Professions Code
- Fraud and Deceit
- Intentional Misrepresentation
- Negligent Misrepresentation
- Breach of Fiduciary Duty
- Professional Negligence
The lawsuit seeks class-action status welcoming the possibility that the attorneys working for the plaintiffs can prove that PacLife's behavior in marketing a certain indexed universal life insurance policy violates the law and hurts many people across the United States. This is an interesting lawsuit for several reasons and while I'm not surprised PacLife is at the center of an indexed universal life insurance lawsuit, I'm suspect of the strength of the plaintiffs' argument.
Not that I want to discount the plaintiffs' potential suffering, I simply feel that the evidence provided in the complaint falls short of proving wrongdoing. That said, I do have some additional thoughts on what the plaintiffs' legal team might have in their possession that could be bad news for PacLife, and potentially bad news for the insurance industry as a whole.
Click here to read the entire complaint.
Leveraged Indexed Universal Life Insurance
At the core of this lawsuit are PacLife's PDX Indexed Universal Life Insurance policy and its extremely obtuse multiplier bonus. The plaintiffs allege that PacLife designed and marketed this product specifically to skirt the spirit of Actuarial Guideline 49 (AG49).
Additionally, the plaintiffs allege that PacLife knowingly brought the product to market under conditions it knew it had no chance of sustaining and used extremely optimistic assumptions to illustrate values to lure in unsuspecting new policy owners.
The complaint spends several pages building a case to define PacLife's character.
It also mentions another aspect of PacLife's product that touches on a very interesting subject…
Not Blending a Policy is…Illegal?
The complaint mentions policy blending by noting that:
…PacLife offers agents higher commissions–up to three times higher–to steer customers into a PDX Policy with all or a substantial portion of the face amount allocated to base coverage, even the policy charges would be far less under a blended structure.
This is the first I'm aware of blending showing up in an official legal complaint against a life insurer, and it introduces something I have long wondered about the life insurance industry and the marketplace for cash value-focused life insurance sales.
Blending exists as a way to manipulate a policy's design and augment the cash value achievable in the policy. For those seeking out whole life insurance as a retirement option, Infinite Banking® et. al. strategy, or any other savings/wealth accumulation plan there are certainly shade of necessity for blending as a crucial component of the plan implementation. Agents who market life insurance as a savings vehicle, but fail to make use of blending have always ventured into territory that might one day be illegal, and this lawsuit might be the catalyst for that eventual discussion/reality.
Ultimately, the blending discussion is one of simple suitability. Is it suitable to sell someone a life insurance contract that lacks the features known to enhance cash value when you the agent know cash value accumulation is the primary goal? That's a big question many have asked for years. I'm not necessarily saying that was the circumstance in this specific case, but the complaint brought it up and it could become a subject for further exploration among insurance regulators.
But outside of a very complex legal/ethical issue for selling life insurance, it's amusing to me that indexed universal life insurance is the focal point for a blending conversation and its necessity when marketing and selling life insurance.
We're certainly no strangers to policy blending, and we're big advocates of its use. But that application usually applies to whole life insurance. Blending allows us to take many of the cash-building advantaged attributes universal life insurance has and give them to whole life insurance. Blending for indexed universal life insurance policies normally has little long term effect on cash value accumulation and most typically results in a reduced surrender charge. PacLife has always taken a different approach to blending and certainly manufactured products where blending term insurance did enhance policy cash value performance. It's a weird concept for universal life insurance (since it's effectively term insurance already).
Alleged Facts of the Case
Plaintiff Hong Li and her family met with agent Tiffany Xu in 2018. Agent Xu recommended Li buy a PacLife PDX policy designed to accept five $500,000 annual payments. After the fifth annual payment, Xu claimed Li would owe no future premiums and even be able to take income from the indexed universal life insurance policy in the amount of $175,000 per year.
Li and her family met a second time with Xu and at that meeting, Xu presented Li with a new life insurance illustration for the same PacLife IUL policy, but with a few alterations from the original proposal that appeared to make little significant change to policy values.
Li agreed to buy the policy and PacLife officially issued the policy effective mid-2018.
After making two $500,000 premium payments, Li became suspect of the policy when statements she received from PacLife reported value far different from the figures she anticipated. Acting on a tip she received from a family member, who holds an insurance license, Li requested several in force illustrations from PacLife depicting varying scenarios premium payment scenarios to the policy moving forward; one of those scenarios included staying the course.
The in-force illustrations provided by PacLife depicted much lower values than the ones Li saw in the original illustration used by agent Xu to sell her the PacLife PDX policy.
The dramatic change in policy values was the motivation for filing the lawsuit.
Observations from the Complaint
There is no denying the notion that PacLife has one of the most complex indexed universal life insurance products on the market. Its approach to multipliers and other common IUL features can be confusing and seemingly over-complicated. We've had our skepticism about the products for a long time.
What will be most interesting here is if the plaintiffs' attorneys can prove their allegations based on little historical evidence and a majority of hypothetical future performance. The policy in question is very new in relative terms. So PacLife could theoretically explain away its underperformance as variability in the market. Side note on this: the complaint does charge that PacLife materially misrepresented the conservative nature of IUL by both failing to disclose the risk of loss when an index return is zero (net loss due to insurance expense deductions) as well as the impact the multiplier has on the policy.
I can only speculate, but I'm guessing that the plaintiffs' legal team's case will hinge heavily on its ability to prove that PacLife cannot return to the capability it assumed at policy issue and that those assumptions were never going to materialize. While many of us might look at market conditions and quickly draw such a conclusion, that case may be much more difficult to argue in a court of law.
It will also be interesting to see what happens with the agent Tiffant Xu and her insurance agency. They are both named as defendants in the complaint. The complaint does allege specific wrong-doing on the behalf of agent Xu. It's peculiar, however, that Xu is a named defendant given the suit seeks class-action status.
It will also be interesting to see what, if any, future regulation comes about from this lawsuit. The NAIC amended AG49 this year to eliminate multipliers from sales illustrations. So regulatory action already removed one of the key pillars of the plaintiffs' case against PacLife.
This is exactly why showing the worst-case scenario on a life insurance illustration is important.
It sets expectations. Even if you don’t believe the guaranteed rates are “realistic”, the fact is they are a theoretically possible scenario, else they wouldn’t be there.
This isn’t just an IUL issue. The same logic applies to whole life, too. Any non-guaranteed element in any policy is necessarily a question mark.
We might speculate on future scenarios using math equations, but that’s all they are — speculations.
Not blending in an IUL is more devastating than in whole life. Allow me to explain. Let’s say, someone has a $1 million life insurance need. You can design it as 100k base policy and 900k as term in a whole life.
The same should be done in IUL. How, you ask? Simple! Write a 100k IUL and another 900k a 30 year term policy. But unscrupulous agents are writing all 1 million in IUL. They get a fat commission check and leave the policy underfunded, waiting to blow up in a few years. That’s criminal!
Hi Jason,
I think you are very correct in the context of an agent motivated to write more permanent life insurance per the budget/death benefit need, but the context of this discussion was blending used to maximize cash building potential of a policy.
When, if ever, will the public ever understand that insurance is insurance and that investments are investments? What if an auto insurance company padded its premiums to fund a savings account and then, at auto accident time, used the policy-holder’s savings to pay its claims? Duh! I wrote “Financial Recovery” in 1980 and the industry invented Universal Life as an end-run around cost disclosure. The old justification for the delusion (some would say fraud) of necessary capital accumulation from the public wore thin decades ago.
Hi Stewart, I think your oversimplifying by categorizing the world as only having investments. Your suggestion that this works by padding premiums to fund a savings account shows you may have a basic understanding of traditional nonforfeiture life insurance (your presentation is skewed with pejorative undertones), but you are missing the point of a traditional IUL sale in the context of this lawsuit. Given the makeup of the life insurance market in terms of annual sales (overwhelmingly cash accumulation product majority), I’m dubious to your claim that anything wore thin with the public decades ago. You might not like it, and that’s completely fine. But we demand a fact-based level of argument around here.
I am shaking my head in utter astonishment your hijacking the Pac Life case into a discussion about blending is so far off the mark it borders on blogging malpractice. All you need to know about this case is that a after making two installments of $500,000 into an IUL, a policyholder ended up with a surrender value of under $400,000, having borrowed or withdrawn nothing. The policy claimed to use a 6% which in reality was 24% by dint of a 4x multiplier. This was not disclosed to the policyholder. This is not a matter of failing to illustrate the worse case scenario as someone suggested. It was a matter than when the 6% advertised rate fell by 18%, the 4x multiplier turned this into a 64% loss. When interest rates fall, insurance company general accounts have less money available to purchase the options on the SP500, which in turn forces a lower illustrated rate. Not one of the facts of this case has anything to do with blending or worst case illustrations, because no worst case illustration ever contemplated this scenario. Pac Life is not the only guilty party here, it is all of the dishonest IMO’s who lure in frankly dumb agents my means of above average commissions for a high borrowing contract. This blog has done nothing to educate anybody. This policy was a loser regardless if it was a level or increasing death benefit. The lesson learned is that the life business is manned by mindless trolls who are easily brainwashed by the IMO masters.
The point in discussing blending was that the complaint brought it up in the context that the agents who sold the policy did not disclose to the client that there was an option to potentially make a “better” policy that had a lower cost versus a non-blended design. This was an aside because, to my knowledge, this is the first time a complaint filed spoke to blending as under the suggestion that the agent(s) broker their duty to the client (fiduciary or otherwise) because they did not use this method of policy design.
We’re not defending the product, the company, or anyone involved in selling it. We’re looking at the situation and noting the various implications of this lawsuit.
Maybe next time spend a little more time on reading comprehension before unloading your half-cocked rant because you have some beef with life insurance, marketing organizations, or whatever has you all in an uproar.
Don’t you think this is an issue of the company you should pick to deal with IUL rather than the IUL concept itself?
That was largely the point of the blog post and podcast. With the mention that companies can often cause problems for a product category as a whole when they issue products like this.