Last July, a lawsuit was filed against Nationwide Life Insurance Company of America alleging the carrier “made false representations and omissions of material facts regarding the cost of insurance charges and cost of insurance rates” for two variable life policies. The plaintiffs in the case included the grantor of a life insurance trust, who was also the insured, his daughter, Laura, who was the trustee as well as the agent of record on the policies.
A life insurance trust created in 1994 purchased one $500,000 policy that year, and another in 1996. According to court documents, two decades later, in 2014, the plaintiffs determined that there might be a problem with the policies, when a review of the policies’ quarterly statements disclosed that “policy charges were eroding the policies’ account values.” Although the original suit mentions that a variable policy allows the owner to allocate the cash value among an array of “separate accounts,” it does not mention the rates of return obtained in the policies, or if they suffered any market losses.
According to the complaint, after attempting to gather information from the carrier as to how the cost of insurance was calculated, Laura was told by the carrier’s Office of Compliance that she would be “unable to get that question answered.”
In April of 2015, the plaintiffs sent a letter to the carrier concerning their issues around the cost of insurance and the carrier’s “false representations and omissions.” Although the letter specifically said that the claims outlined in the letter were not claims against Laura, Nationwide filed a Uniform Termination Notice against her, stating that a written complaint was filed for “misrepresentation in the purchase of a variable life insurance policy.” The plaintiffs believed this was “an egregious and abusive act of retaliation” against Laura.
The plaintiffs claimed breach of contract and fraud among other charges. The policies provide that “current cost of insurance rates” are determined “based on . . . expectations as to future mortality costs and expenses.” However, according to the suit, the carrier, “repeatedly has increased the amount of the cost of insurance charges deducted . . . for reasons wholly unrelated to changes in future expectations.”
The lawsuit pointed out the policies had “exorbitant” COI increases with “the monthly cost of insurance charges deducted by Nationwide from the policies” increasing “substantially each year (except for one year)” in both policies. The total COI percentage increases from initial policy issue until 2016 were 430% in the 1994 policy and 398% in the 1996 policy. According to the suit, the increased costs “wholly unrelated to changes in future expectations” caused the policies cash values to be “drastically eroded” leaving the policies “in imminent danger of lapsing.”
The suit asked for “compensatory damages in the form of two paid up life insurance policies … (with no future premiums required), each with a death benefit of $500,000 plus the cash value of the policy.” Note: Both variable policies were issued as Option B, which pays the stated death benefit, plus the cash value in the policy at death.
While it is clear that the cost of insurance went up almost every year since policy issue, it is not clear that the actual “cost per thousand” charges were higher than shown in the original policy “as sold” illustrations, as with other COI increase cases like Transamerica and AXA. We, at ITM TwentyFirst, have been unable to determine any COI increases in the Nationwide variable life policies that we manage, except for the year to year increases that are seen in every universal life chassis product that reflect the increasing age of the insured.
In Nationwide’s Motion to Dismiss filed August 31, 2016, the carrier characterized the case as “buyer’s remorse,” with plaintiffs creating a “reason to walk away . . . free of charge” after obtaining 20 years of “valuable life insurance coverage,” and taking the position that Nationwide was “required to charge the same amount for . . . coverage every year,” which is “contradicted by the plain terms of the policies.” Nationwide pointed out that the trustee was “a sophisticated consumer,” a life insurance agent who purchased the policies “in her capacity as Trustee.”
Nationwide included over 140 pages in their motion exhibit that included both policy contracts and copies of statements received by the plaintiffs over the years, illustrating policy performance and the increasing cost of insurance. The motion also included contract language that specified “cost of insurance rates are based on the Insured’s Attained Age, Sex, Premium Class and Duration,” language that was not included in the original plaintiff’s complaint, a “major omission,” according to Nationwide.
On January 9th of this year, Warren Eginton, Senior United State District Judge, US District Court for the district of Connecticut, denied Nationwide’s motion. On February 1st of this year, the same judge issued a Stipulated Order that FINRA would “expunge the U5 Amendment” against Laura and the agent/trustee would drop any complaints against FINRA, with each party bearing their own legal costs.
Unlike many COI increase lawsuits we have written about in the past, this is not a class action suit, and it may find its way to a confidential settlement before a final verdict, but if it does not, the outcome will be interesting. We will be providing updates as they unfold.
If the policies were issued Option 2 the net amount at risk remains constant, e.g. coi’s are based on $500,000 every year… it should be easy to determine and compare current Coi per thousand to the ‘originally illustrated’ coi per thousand.. unless I’m missing something.
Thanks for reporting on this!
Lori Denison, CLU, ChFC, CAP, AEP
Life Blueprints, LLC
(561) 313-6958 direct line
(800) 507-7115 office
(800) 507-4743 fax
Correct, Lori. The net amount at risk was constant on these policies, so the COI was based on the full death benefit. Actually our servicing team pulls actual COI out and compares them to COI on previous illustrations on a daily basis on policies that are not Option B. It just takes an extra step. But in this particular case, I cannot see in any document that this was done to show that actual COI increased in these particular policies over what was projected at sale. And as I mentioned, we have not seen any actual COI increases in any Nationwide variable policies we track. So, we will have to see what the outcome is. Thanks for your comment, Lori. Hope all is well.
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