Did anyone wave a yellow caution flag at NASCAR legend Kyle Busch in 2017 before he and his wife, Samantha, bought a pair of multi-million-dollar Pacific Life indexed universal life insurance (IUL) policies that promised them almost $800,000 a year in tax-free retirement income?
No one did, say the couple, who are suing to recover $8.5 million of the $10 million they paid for the policies. (Pacific Life disagrees. In a January 22 motion to dismiss the case, it claims the policies’ risks were fully disclosed.)
In the civil complaint they filed three weeks ago in a North Carolina federal court (superseding the complaint they filed in state court last October), Kyle and Samantha Busch accused their insurance agent, Rodney Smith, of duping them and the carrier with abetting the agent.
Given that Busch, who turns 41 in May, is one of the winningest drivers in the history of stock-car racing, the lawsuit has sparked a wave of public and private commentary. “Indexed universal life has never had a more high-profile, celebrity-powered public relations crisis,” noted annuity marketing guru David Macchia last fall.
Kyle and Samantha Busch
“Kyle Busch put $10.5 million of premium into a product that he thought would produce millions of dollars of income,” wrote ValMark CEO Larry Rybka in an email. “He actually got something that was going to lapse within 10 years, produced no income, and burned up $8.5 million of his $10.5 million.”
IUL policies are popular life insurance policies bought for a variety of uses. They can create a tax-free death benefit for survivors, a hedge against estate taxes, or tax-free income in retirement (in the form of loans from the life insurer, backed by the cash value of the policy). An underlying fixed indexed deferred annuity drives the growth of client’s account.
Ideally, a client might pay premiums for only five to seven years. After that, if all goes as planned, the interest generated by the crediting formulas of the underlying fixed indexed deferred annuity could—it’s not guaranteed—cover any additional costs (future premiums, the cost of life insurance, the agent’s commission, and the interest on money borrowed from the carrier.
But the policy premiums were apparently applied to the FIA’s fixed-rate crediting sleeve instead of one its equity index-based sleeves, thus gaining only 2.25% per year instead of the nearly 6% illustrated by the agent.
Despite several million-dollar premium payments, that minimal rate of growth couldn’t cover the agent’s hefty front-loaded commissions and the annual expense drag of tens of millions of dollars’ worth of life insurance. The suit also accuses the agent of replacing his clients’ policies after only two years, creating a new set of commissions for himself.
In this case, according to one expert’s examination of the agent’s predictions for the performance of the Busch IUL policies, Busch and his wife were led to believe that if, at age 33 in 2018, they put $1.5 million a year into the policy for five years, the cash value of their policies would grow at the rate of almost 6% a year and yield $787,000 a year in tax-free income after Busch reached age 52—or large death benefits if he or his wife died prematurely.
“Plaintiffs believed they were securing a low-maintenance, high-return retirement investment product that would generate tax-free retirement income for life. The claim that they could stop premium payments after a few years and still receive substantial financial benefits was a gross misrepresentation of the policies’ actual performance requirements and risks,” the suit says.
But an IUL contract demands about as little maintenance as an eight-cylinder, 750-horsepower, 200-mph NASCAR stock car. And in the hands of an unskilled, or untrustworthy driver, or pit crew, such a policy can crash and burn.
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