What You Need to Know About Universal Life Insurance Fraud
Steep increases on certain universal life insurance policy premiums are attracting nationwide attention.
A growing problem surrounding universal life insurance policies issued by some insurers is mounting in scope and scale as fast-rising costs for certain policies continue to be brought to light.
Some policyholders of universal life insurance products are now facing increases on their premiums in the double-digit percentages. While universal life insurance premiums can be variable by nature, the underlying justifications for these big price hikes—sometimes amounting to thousands of dollars a year just to keep a policy in force—have drawn scrutiny.
Consumer advocates suspect the increases may be fraudulent. At the crux of the problem are allegedly fraudulent increases that are commonly described to policyholders as “cost of insurance,” “the monthly deduction rate,” or with another label . These premium hikes have spurned several class action lawsuits against universal life insurance providers.
In February 2016, the Consumer Federation of America sent a letter to all state insurance commissioners asking them to examine price increases on universal life policies and institute regulations to prohibit any unfair practices.
At Vinas and Deluca, we are closely monitoring the development of universal life insurance overcharging investigations and litigation. We continue to take action on behalf of clients who may have been unjustly or fraudulently overcharged on premium increases by their insurance providers. And we will keep our readers informed on all the essential facts surrounding potentially unwarranted universal life premium increases, related litigation, and ongoing industry updates.
Here are some basics about the issue and universal life insurance.
• What is universal life insurance? Universal life insurance lasts for the policyholder’s life, or to an advanced age, providing a death benefit along with a tax-advantaged savings component that accrues value over time. This type of “permanent” life insurance policy became popular in the 1980s and 1990s, when interest rates were much higher than today, but they again became popular after the most recent financial crisis. They have accounted for at least a quarter of all new individual life-insurance sales since the 1980s, and more than a third in the last 10 years.
• Why is it becoming problematic for insurers? Universal life policies were designed to take advantage of high interest rates in order to reduce premiums and provide built-in savings. But for many years, interest rates have been at historic lows, while the financial world has endured two stock market collapses, the housing bust, and economic downturns. This means the financial theory upon which universal life policies were created has not been playing out in reality. What’s happened instead is that insurers have been forced to meet guaranteed minimum interest rates provided when policies were written—rates that are higher than the interest they are actually earning on the cash portions of the policies.
As the cost of insurance continues to rise for aging policyholders, some universal life policies use the cash reserves—the result of policyholders faithfully paying several thousand dollars a year—to cover those premium increases, further depleting the savings until they are exhausted. The insurer then passes the remaining premium costs on to the policyholders, who must pay if they want to keep their death benefits in force. In many cases, the savings component of the policy no longer exists.
• But that’s just the effect of the market today. What are the allegedly fraudulent premium increases? The potential wrongdoing may lie in how insurers respond to these underperforming policies, and whether their actions violate the terms of the original contracts.
Certain insurers have tried to compensate for the low interest rates (with the aim of preserving their own profits) by increasing one or more of the components that affect universal life premiums—the most common being called the “cost of insurance.” But, according to some insurance industry leaders and, allegedly, the fine print of many universal life contracts, the cost of insurance should be based on current mortality rates, and have nothing to do with interest rates.
Given the systemic nature of the financial crisis affecting many universal life insurers, it is possible that other insurers have also instituted premium increases that may violate contract terms or present other legal problems. Anyone who has experienced a premium increase in the past several years should seek out legal advice.
Vinas & Deluca along with Rivero Mestre are currently prosecuting cost of insurance increase cases against Principal Life Insurance Company. A copy of the complaint can be found here. If you or a loved have a Principal policy and their cost of insurance rates has dramatically increased, please give us a call.
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