Several insurance professionals shared their views on the indexed universal life (IUL) policies that are at the center of the complaint filed by Kyle and Samantha Busch against Pacific Life Insurance Company and insurance agent Rodney A. Smith in U.S. District Court in North Carolina. You can find their comments below.
What RIJ hears: Properly designed, IUL policies can be successfully used for savings, ‘tax-free’ retirement income, estate tax planning, and/or a death benefit. But the complexity and opacity of the products, and the potential for manipulation of financial projections by unscrupulous agents, has led to their abuse. And insurance regulators’ efforts to police them have repeatedly fallen short.
Sheryl Moore, Winkintel.com
While all of the facts on the [Busch] case haven’t yet been released, many are speculating that this is a case of an agent behaving badly.
Indexed life is commonly sold as a ‘LIRP,’ or ‘Life Insurance Retirement Plan.’ This strategy typically has the agent search for the least amount of death benefit that a given premium can offer. The client pays that premium for [20] years, and then begins taking loans out of the contract, and uses the funds for their retirement income.
The problem? Indexed life [contracts] may earn less than what is communicated to the client via the illustration. It could earn zero interest. Further, depending on the type of loan taken, the loan interest rate may be greater than what the illustration communicates as well.
To boot, the client could take any number of actions that result in the illustrated values not coming to fruition, such as not paying the premium on time, taking a withdrawal, not paying their loan interest, etc.
Bobby Samuelson, lifeproductreview.com
There are a litany of errors that all contributed to the ultimate outcome [for Kyle and Samantha Busch], but none more egregious than a policy clearly configured to maximize compensation to the agent at the expense.
His analysis showed that the couple paid premium of $3.75 million over the first four policy years, but the policy charges over that period—including a large agent commission—were $4.15 million.
These policies were doomed to fail. No contract should be set up to consume nearly 90% of the premium in policy charges over the first 10 years. No contract should be left to die in a fixed account yielding 2.25% when more competitive indexed crediting options are available.
David Macchia, Wealth2k.com and Definedbenefitlife.com
As long as you manage the insurance amount (buy at least the minimum required amount of life insurance coverage), [IUL] is a great concept. But it gets spoiled by over-aggressive growth assumptions. The agent puts policies in place that are based on static assumptions, but the future is dynamic. If the contract is unmanaged, it becomes a problem. And the agents have significant control over how much they make. In this case, instead of taking a $1 million commission, he could have taken a $200,000 commission—and then Busch would have sent his friends to him.
Larry Rybka, Valmark Financial Group
Kyle Bush put $10.5 million of premium in a product that he thought would produce millions of dollars of income. 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 of money. IUL is the super Pinocchio of the ledger lie.
The underlying assumptions of AG-49 [The 2015 actuarial guideline published by the National Association of Insurance Commissioners that imposed stricter restrictions on policy illustrations for IUL products], even without all the gimmicks of proprietary indexes, bonuses, and multipliers… are completely unreasonable. If someone did the same thing with variable [universal life] they would be committing fraud.
Peter Gould, retired pension professional
Consumers ought to get acquainted with the idea of getting a financial second opinion from a dis-interested party – especially if considering a major purchase. You get one for a surgery. (hopefully), You check with your mechanic or consult Consumer Reports before buying a car. But you don’t get a second opinion when plunking down $10 million for an IUL Swiss Army knife? With the pitched promises, [the customer’s] greed kicks in and common sense flies out the window.
Antoine Orr, Plancorr Wealth Management
Why are loans from a life insurance company called ‘income’? It’s not income. Money from a home equity loan isn’t called income, so why are we doing it with life insurance? When the agent positions the loans—against a policy’s cash value—as tax-free income, the sales pitch obscures the cost of the loans. The cash value is eroded by the interest charged on the loans, as well as by the premiums for maintaining the life insurance benefit, and by any residual home office fees and agent compensation. “Eventually the policy loans may exceed the cash value, and you have a taxable event,” Orr told RIJ in a phone interview.
They say that IUL works if ‘structured properly.’ But no policy can be structured properly because the illustration [of future outcomes] that the client sees is only one of a thousand possible outcomes. If the illustration shows, for instance, a 4% dividend or 8% crediting rate, the policyholder thinks they will get that return from day one. The illustration itself says, “The numbers shown are not likely to occur.” Besides that, in an IUL, the insurer can change anything they want, such as the cap rates on the crediting options. The outcome can be engineered. The agent is not criminally liable.
The tax monster becomes a scare tactic. An agent might say, ‘Wouldn’t it be better to pay 6% interest on a loan of tax-free income than to pay income taxes at 40%?’ But as the debt that finances the loans accrues, the interest on the loan becomes a bigger monster than the tax on the income. And 40% is only the marginal rate.
For most people, the effective tax rate will be closer to 20%. Life insurance can be a great thing when used as an offset of estate taxes. Ray Croc (founder of McDonald’s) did not buy life insurance to build wealth. He bought life insurance to protect the wealth he already built from estate taxes.
Barry Flagg, Veralytics.com
The Kyle Busch case isn’t an isolated example of ‘an agent behaving badly.’ The current regulatory regime rewards the reckless and punishes the prudent. Almost a dozen other insurers and countless other agents are defendants in similar complaints.
Specifically, NAIC Illustration Model Regulations permit agents, brokers, and insurers to ‘quote’ low premiums and project high growth, giving the appearance of low costs. Instead, they charge high costs without disclosing them–and without disclosing the high risk of future ‘premium calls’ for more than the originally quoted premiums, or the risk of total loss due to policy lapse even if all originally ‘quoted’ premiums are paid. NAIC Illustration Model Regulations permit what would be considered fraud in any other segment of the financial services business.
While NAIC Illustration Model Regulations were well‑intended, they are flawed to the core, have been re‑opened three times already in less than 10 years with ‘whac‑a‑mole’ attempts (Actuarial Guidelines 49, 49A, 49B, and 49C) to fix the problem. NAIC Illustration Model Regulation need to be retired in favor of ‘Clients’ Best Interest’ rules.
Tom Love, Colton Groome Financial
It’s not just a desire to avoid taxes that motivates the purchase of IUL policies. Nothing on the planet can touch the income shown from some of these products when using a participating loan and aggressive design assumptions (that will never pan out).
The agent controls the framing of the narrative. The pitch is simple and solves all the client’s problems in one bucket. It’s a well-rehearsed story that comes out smooth as silk:
- No market risk!
- Look at these historical returns!
- Tax-free retirement income that can’t be matched by anything else!
- No contribution limits!
A rigged comparison will give the client the impression that the IUL is a fantastic solution that is infinitely better than the alternative. The message hits multiple emotional triggers: Aversion to loss, certainty (of retirement income), control of the future, simplicity, exclusivity (IUL is marketed as a secret of the rich), etc. People make decisions and take action when emotionally engaged.
Even worse today: Agents are making sales presentations electronically and using non-compliant software tools that leave no digital or paper trail. So, the agents can show and say anything! A group of consumers will get screwed over but proving any wrongdoing will be an uphill battle.
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