I Guess If You Are Going to Hand Money Out, Some People Will Take It…(Allegedly)

Another interesting lawsuit was filed in California, home of many interesting life insurance-related lawsuits. Transamerica Life Insurance Company filed a lawsuit this month against various California life insurance agents and their firms. In the suit, the carrier alleged that the agents sold Indexed Universal Life (IUL) policies to individuals “who did not need or want the insurance and/or could not afford the insurance, and who had no intent of ever paying premiums for the policies, including both initially and to keep the insurance in effect after one year.”

According to the allegations, the agents provided the initial funds to purchase the IUL policies and then used the commissions generated from those sales “to pay first year premium on additional IUL policies on behalf of prospective policy owners.” Transamerica charged that the agents worked to make “the payment[s] appear as if they originated with the applicant.”

In almost every instance, the referenced policies have lapsed because second-year premiums were not paid. Transamerica points out that “it would not make financial sense for an individual to buy permanent life insurance coverage” for one year of coverage. So why would anyone do this?

I heard about this type of arrangement anecdotally about a year ago from some good friends in the life insurance brokerage world.

While it seems this transaction may not make sense for the insured(s), it apparently (allegedly) can make sense for enterprising agents taking advantage of an interesting and lucrative commission structure for these policies. Transamerica is apparently seeking damages of approximately $5.8 million. This amount is equal to the total commissions paid to the defendants and their affiliated firms (approximately $12 million) minus the total premiums received by Transamerica. In other words, the first-year commissions paid out by Transamerica on the referenced policies were almost $6 million more than the total premiums paid to Transamerica.

I have no idea how the math on all of this supposedly (and allegedly) worked (taxes, expenses, etc.), and I certainly do not condone this, but as I said, if you are going to hand out money, some people are going to take it. In this case, some agents (allegedly) decided to. Now we will see if they get to keep it.

2 thoughts on “I Guess If You Are Going to Hand Money Out, Some People Will Take It…(Allegedly)

  1. As a 30+ year veteran of the life ins. Industry, the life brokerage distribution channel has grown to this! Instead of having a commission structure that encourages service and a long term ownership, the so called “heaped” commissions strongly encourage only new business sales as this case illustrates in a big way! A flat commission structure would fix this as well as the inherent absence of on going service so universal in this bedrock industry. Greed at the company level resulted in the heaped first year commissions and companies offered more and more incentives like 100-120% first year payouts. ( the annual premium of $10,000 pays a commission of $10,000- $12,000!) This in turn appealed to the greed of this new Ponzi scheme of self interest. Remember the origination of Single Premium Universal Life in the late 1980’s? Interest rates in the double digits, insurance cost of 1.5 -2% per year, and Tax free loans.
    A deposit I’d $100,000 bought $110,000 face. The cash value was $109,000 after a year. Take a loan of $8000 and voila! A cool 8% net after tax return with little or no risk if done with a big solid company. Factor that for a high tax bracket owner in the 50% bracket and CPA’s and stock brokers were suddenly in the life insurance business. This resulted in a change in the tax code now know as Modified Endowment Contracts. Let’s see if our Govt can still respond.

  2. Thank your for your response. Though I share in some of your opinions, I do cringe at the thought of the government getting involved. Though I would like to see some more industry incentive to manage policies after the sale, I also know that I sold my house last year and paid a commission that was roughly equal to one year’s mortgage payment, akin to a first year premium. That is more in line with insurance industry standards as I understand them. This case appears to me to be an aberration…a higher commission than normally paid, but I could be wrong.

    One thing I have noticed about the industry is that it tends to take a reasonably good idea and stretch it to the point of breaking, especially when big money is involved. Case in point….Stranger Owned Life Insurance (STOLI). That started with the simple idea that the internal rate of return on a life policy was a pretty good investment. Something that the TOLI industry certainly believes in. Once deep pockets outside the industry threw their money into the ring, wealthy individuals were convinced to use a new found asset, their insurable interest, to purchase life insurance they might not have purchased except that for the fact that the insurance would be “free” for a period of time, based on a non-recourse loan floated for two years, after which the policy could be sold and the profits divided. Once the “free insurance” concept gained steam and the commissions flowed the “wealthy individuals” were soon fabricated and hundreds of millions of dollars of “fraudulent” death benefits were put on the books based on mythical net worth statements. Unfortunately, for some agents, Google and Zillow searches, along with follow up calls from the carriers to forgetful elderly “clients,” made the ruse easy to discover.

    And we cannot just point the finger at the insurance industry. Didn’t the whole financial meltdown occur because of a simple idea that home ownership was as American as apple pie?

    One thing that is consistent in all of these situations…they always seem to end with lawyers called in to clean up the mess.

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