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March 05, 2024 at 11:33 AM
What You Need to Know
- The legal fight concerns whether an insurer must include mortality in cost-of-insurance rate scale updates due to language in its contract.
- The policy in question ended up in the portfolio of Life Partners, a publicly traded life settlement investment company that went bankrupt.
- The policy mortality charges increased to $286 in 2019, from $125 in 2012.
A federal appeals court in Atlanta is letting life settlement investors continue their fight against increases in universal life insurance policy cost-of-insurance charges.
A three-judge panel at the 11th U.S. Circuit Court of Appeals ruled Friday that the owner of the universal life policy insuring the life of Worth Johnson can move ahead with a suit over how Protective Life set universal life policy charges.
Protective had no legal obligation to update cost-of-insurance charges, but its policy language may have created an obligation for it to consider future improvements in mortality when it did update the COI charges, the panel said.
The policy owners who filed the suit are seeking to have Worth Johnson represent a class of hundreds of consumers who bought Protective universal life policies after Aug. 13, 2012, and had policies with language indicating that Protective would update the COI charges to reflect changes in mortality.
What it means: Representatives for the policy owners were not immediately available to comment about how they see the ruling.
Senior U.S. Circuit Judge Frank Hull indicated in the opinion that the plaintiffs had presented a breach of contract claim that was framed well enough to go to trial.
But “it remains to be seen what can be proven,” Hull wrote.
John Neiman, an attorney at Maynard Nexsen and a member of the Protective legal team, said the team sees the 11th Circuit ruling as a victory for Protective.
The 11th Circuit panel’s ruling found “that the policy does not require Protective to change its COI rate scales in response to alleged mortality improvements,” Neiman said.
The panel also rejected the plaintiffs’ argument that policy provisions indicating that COI charge increases would be “based on” mortality require insurers to base COI rate scales solely on mortality expectations, he said.
“The only point on which the 11th Circuit remanded the case was to consider the plaintiff’s alternative theory, which is factually inconsistent with their main theory and yet to be proven,” Neiman said. “Protective has done nothing wrong, and we intend to prevail on that theory as well.”
Universal life cost-of-insurance charges: Universal life policies give policyholders a way to make permanent life insurance more flexible, by separating the accounting for death benefit protection, administrative costs and cash-value buildup.
Depending on the nature of the universal life policy, the policyholders may be able to vary the amount and timing of the premium payments. Increases in the policy cash value of a traditional UL policy are based partly on changes in interest rates. Issuers tie the cash value of a variable universal life policy to the performance of investment funds and the cash value of an indexed universal life policy to the performance of investment indexes.
The COI charge is supposed to be what the policy owner pays to cover the cost of the death benefits and other policy expenses that do nothing to increase the policy’s cash value.
