Life Insurance

Summary

Life insurance companies that fail to properly administer and correctly calculate the contractual components of their policies may be sued on behalf of a class of all similarly situated policyholders. These cases may involve policies issued using a universal life insurance framework (or chassis), and the misconduct typically involves incorrectly calculated Cost of Insurance (“COI”) rates or, in the case of indexed policies, impermissibly-low crediting caps or participation rates. Misrepresentations in how these policies are marketed and sold may also occur.

The lawyers at Sarraf Gentile LLP have extensive experience litigating life insurance misconduct and have helped recover hundreds of millions of dollars on behalf of injured policyholders. Some insurance-related cases in which the firm has been involved include In re State Farm Cost of Insurance Litigation ($325 million recovery) and In re Lincoln National COI Litigation ($117+ million recovery). A list of the firm’s most notable cases can be viewed here.

Policy Types

Life insurance policies vary in type, size and features. Most policies which purport to include permanent coverage (i.e., a permanent death benefit) contain an investment, interest bearing, or savings component where cash value is accumulated. Some variations of permanent life insurance include Universal Life Insurance (“UL”), Whole Life Insurance (“WL”), Variable Universal Life Insurance (“VUL”), Indexed Universal Life Insurance (“IUL”), among others.

These policies contain provisions on how the cost of providing the insurance coverage is calculated and what factors may be considered in calculating that cost. These policies also contain detailed language regarding the treatment of the cash value in the policy and how crediting rates are calculated for those assets. When insurance companies miscalculate or cause to lower the benefits in violation of the policy terms – by artificially inflating costs, neglecting to reduce costs when required, artificially deflating crediting gains, misrepresenting policy terms, etc. – policy holders may sue to correct the error.

Cost of Insurance (“COI”)

Life insurance COI provisions address what underlies the most important monthly charge to policy owners – COI rates.  COI rates are intended to cover the insurer’s costs in providing coverage to the insured. These rates are typically determined, in part, based on the individualized mortality characteristics of the insured such as gender, age, health, and smoker status.  The younger and healthier the insured is, the lower the COI rate he or she will incur on the policy. Indeed, as mortality expectations have improved over the last several decades, certain rates should be lowered rather than increased. Insurance companies may sometimes also consider future interest rates and investment returns in calculating the COI rates. How they do so, however, is subject to review.

Indexed Products – IULs & FIAs
 
Many indexed policies (such as Indexed Universal Life Insurance policies or Fixed Index Annuities) are sold promising the prospect of risk free gains tied to the performance of a designated “index” – a pooled investment vehicle that follows certain rules so that it can passively replicate the performance of a specified collection of underlying investments or stocks. The monthly premiums (after expenses) paid towards these policies may be allocated into a fixed account or into a crediting segment hinged on the performance of an index.  Some policies allocate these contributions into a hybrid (or proprietary) index which is created solely for the purpose of the product and does not exist outside of it. These indexes are frequently used to illustrate astronomical crediting potential for policies that seldom, if ever, come to fruition.  These are complex policies that require detailed and careful descriptions and disclosures. These policies are frequently misrepresented by salespeople on TikTok or other social media. Unless properly and completely explained, individuals who buy them can be unpleasantly surprised by rising costs, undisclosed fees or promised gains that never materialize. These individuals may have claims for such false promises.

In addition, many indexed policies have complex and dynamic terms that may be inadequately disclosed or improperly manipulated.  For example, most policies have a floating cap rate, which can limit the gains that the policy can actually attain.  In other words, even if an index is advertised as having had a 50% annual gain, it can be sold with a 10% crediting cap that can itself be reduced further at any time. Other policies may also have a participation rate, which limits the number of insureds who can participate in the performance of an index fund and which an insurance company can improperly manipulate.  In either case, the rates are set by insurance companies within the bounds of the contract language.  Sometimes, these rates are cut dramatically, especially in comparison to peer products. This can happen when greed motivates a carrier to violate the policy terms. However, policyholders – who were promised one thing but receive something far less – may have rights that can be asserted in a class action.

Group Life Insurance

Individuals who purchase life insurance through their employer have additional protections beyond the contract terms of the policy itself.  As employees purchasing workplace benefits, they are frequently protected by the Employee Retirement Income Security Act of 1974 (“ERISA”) – a powerful law designed to ensure that employees are treated with the utmost care.  Pursuant to ERISA, the employer owes the employee a fiduciary obligation to act in the employee’s best interest. This includes ensuring that COI and other expenses are properly calculated and that the terms associated with the policy are in the insured’s best interest.  If the costs associated with the policy have been impermissibly raised (or have not been properly reduced), the insured may have a claim for damages. Group Universal Life insurance policies are particularly susceptible to problems on this front.
 
Premium Financing
 
Many individuals finance the purchase of a permanent life insurance policy. In other words, they borrow money to pay for some or all of the policy’s premium. Sometimes clients are lead astray with the expectation that the policy’s crediting gains will forever be greater than the interest owed on the borrowed money generating a “positive arbitrage.”. In that way, unscrupulous agents often promise “free” life insurance.  However, the interest rates on these loans are variable in nature and the crediting returns of the policy may be oversold. This combination can result in very costly policy lapses. In the worst case scenarios, collateral could be seized by the lenders and large tax bills can be generated by lapses with outstanding policy loans.  How such policies are marketed and the disclosures made in their sales pitch become critical.  This is especially so given the complex nature of these transactions and the large dollar amounts typically involved.  Understandably, many individuals do not understand how these policies operate and may have a claim if the policy does not operate as promised.
 
Trust Owned Life Insurance

Estate planning efforts often include placing a permanent life insurance policy inside a trust, such as an Irrevocable Life Insurance Trust (“ILIT”). As such, the trust is managed by a trustee – a compensated third-party charged with a fiduciary obligation to act in the best interest of the trust and its beneficiaries.  But when a trustee fails to act in the best interest of the trust by ensuring that the policy inside the trust is being properly managed, evaluated and monitored, the trust is damaged and the beneficiaries may have a claim against the trustee to recoup those damages.

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Individuals who own universal life insurance policies and experienced increased COI rates and diminished crediting gains may have a right to compensation. The lawyers at Sarraf Gentile LLP have decades of combined experience fighting fraud, litigating class actions nationwide and recouping millions of dollars for their clients. All consultations are free and all class actions are conducted on a contingency basis – meaning the attorneys only get paid if they are successful, they are only paid from the money they recoup and they only get paid if the court approves it.  Sarraf Gentile is a low-volume high-priority litigation-focused firm that deliberately limits the number of cases it accepts in order to give each client and case the utmost attention. The firm’s results can be viewed here and all consultations are free and confidential.