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.