NASCAR Driver's IUL Suit Shows Litigation Revving Up

Comprehensive IUL litigation figures are not readily available.

Some observers have suggested, based partly on data from RP Legal, a law firm that has helped file the Busch suit and many others, that plaintiffs may have filed about 200 individual suits against IUL issuers and about 50 class-action suits.

Larry J. Rybka, an insurance distribution veteran who has been tracking the litigation for years, said in an email that one challenge is that most cases get settled out of court, with the size of any settlement payments hidden behind confidentiality agreements.

Rybka, the chairman and CEO of Valmark Financial Group, predicted that the flow of litigation will increase.

"I can think of no other product that has caused this much trouble," he said.

Indexed universal life: Indexed universal life insurance is a product with a crediting rate, or interest rate, that can be tied to the performance of one or more investment indexes.

Some wealthy people use IUL policies and other "cash-value life insurance policies," or life insurance policies that can build up permanent investment value, to save for retirement and other long-term expenses because they can use a variety of methods to get cash out of the arrangements without paying federal income taxes.

About 5% of Valmark's own sales involve IUL policies. Rybka said he believes that the underlying policies themselves are good products.

"There's never been anything wrong with an IUL product but with how it's illustrated," Rybka said.

Sources of risk: Because IULs are classified as a fixed insurance product, not a variable product that's registered with the U.S. Securities and Exchange Commission, the insurance cannot expose the holder to the risk of an ordinary investment loss based purely on the performance of investment indexes.

Life insurance agents and advisors use standardized documents, or "illustrations," to show clients how IUL policies might perform.

The illustrations usually come with clear warnings against assuming that the actual policy performance will be similar to the performance illustrated, but Rybka and other critics of IUL sales strategies say the illustrations often give clients unrealistic ideas about how the policies will perform.

Owners can end up with less cash than they expect if crediting rates are lower than they had hoped.

Especially in years when investment returns were high, some IUL buyers believed, incorrectly, that interest on the policies would be high enough to eliminate their need to pay more premiums after they had made their initial payments.

Owners can also end up with much worse outcomes than they had expected if they fail to make the premium payments needed to keep policies in force. If the policies lapse, the owners may know that they have received years of protection against the risk of premature death, but they do not get the cash value they were planning to use to cover post-retirement expenses.

Owners may be especially likely to let policies lapse when IUL issuers announce big increases in "cost of insurance charges," or the payments needed to cover a policy's mortality and administrative expenses.

Some owners have tried to increase earnings by using borrowed money, or premium financing, to pay for IUL policies. As a results, some have faced huge losses when interest rates moved in unexpected directions and multiplied the losses.

The Busch suit: Kyle and Samantha Busch sued Pacific Life in a state court in North Carolina, both in their own right and as the trustees for irrevocable life insurance trusts naming each other as beneficiaries.

The couple accused a life insurance agent and company employees of using misleading projections, unrealistic assumptions and material omissions to cause them to pay $10.4 million for arrangements that were supposed to help them accumulate assets for retirement but instead suffered large losses.

Pacific Life has not yet filed a response in court. A representative said in a statement that the company's business has been built on providing insurance products that have helped millions of families and businesses plan for the future.

"We take the concerns raised by Kyle and Samantha Busch seriously, and have been in touch with the Busches and their legal team," the representative said. "We stand by all our life insurance products, including indexed universal life. ... It is important that individuals work with their financial professionals to help ensure their intended insurance needs and financial objectives are met."

The litigation wave: Rybka said most of the cases in the IUL litigation he has examined have involved aggressive marketing and use of premium financing.

"Abusive IUL sales make the job of real life insurance professionals harder," Rybka said. "There are so many good uses of life insurance. My personal financial plan depends on life insurance to pass on my business and protect my family. Our company, trusts and family have purchased 26 policies over the last 25 years, and all of them are on or ahead of schedule."

One concern about IUL policies is that clients who have not received good advice may not understand that life insurers can change the "cap rates," or the amount of investment-index-linked gains included in an IUL policy owner's crediting rate, Rybka said.

"I also think 95% of agents selling IUL don't understand how it works," he said.

When Valmark provides IUL policies, it requires the agents who sell the policies to get signed disclosures showing that the clients know that the index does not include dividends and that the company can change the cap rate, he said.

(Credit: AP Photo/Matt Kelley)