In October of last year, we reported on a settlement in the case against Transamerica for a cost of insurance (COI) increase, which raised the carrying costs on a group of universal life policies by 200% or more. In one example, we reported the cost to maturity on one policy in our portfolio jumped from $36,400 to $81,595, after the policy got hit with a 40% COI increase.
Last year’s settlement grew out of three separate lawsuits that were consolidated in November of 2016. The settlement affected 70,000 policyholders, and a $195 million fund was set aside. It included an agreement that Transamerica would not impose any additional (accent/italics by author) increase(s) “on any Class Policy within five (5) years of the Execution Date,” with any increases thereafter “based only on the collective effect of the cost factors assumed at the time the Policies were originally priced.” Future profitability could not be increased higher than “projected based on original policy pricing assumptions.” This was “intended to ensure that Transamerica does not recover past losses.”
The fund did not pay out cash to the policyholders – except to those who had terminated their policies. The settlement provided cash credits to in-force the policies, but the carrier would still collect the increase imposed on the policies. Except for the policy cash infusion, there was no relief given to policyholders for the higher cost of insurance.
A number of institutional investors opted out of the settlement, and on May 15th, one of those investors moved ahead with a suit filed in the United States District Court, Central District of California, according to an article in The Deal, a life settlement trade publication. (1)
Life insurance investors purchase policies in the secondary market – life settlements – and strip the cash value out of the policies. Then they fund the policies with the absolute minimum amount needed every month to keep the policies in force. The lower the costs to keep the policies in force until the insured passes away, the higher the return to the investor. While the Transamerica settlement did provide policy credits to policyholders, it did not lower the COI increase and did not provide the policyholder with a cash payment, causing some investors to walk away.
According to the article, the opt-outs in this case, were significant, thereby lowering the settlement’s projected payout from $195 million down to $110 million.
The lawsuit filed on the 15th charged Transamerica with breach of contract and breach of the implied covenant of good faith and fair dealing. The plaintiff in the case is an investor in the life settlement field, and for them, it may make sense to move ahead alone against the carriers. They have deeper pockets and higher losses than the average consumer, but that does not mean they will necessarily get more than the average consumer. One attorney associated with the case and quoted in the article referred to it as “a roll of the dice.”
Another attorney active in COI litigation and referred to in the article believes the lawsuits need to force the carriers to pay damages rather than pay a settlement which only credits back a portion of the increase. “You’ve got to make them pay for doing this.”
So, where does this leave the “average” consumer – the TOLI grantor (your client) with a $2 million estate planning policy subject to the increases? How did they make out in the settlement? We have over 60 policies affected by this particular increase, and our clients are now receiving letters informing them of their benefit from the settlement. In the coming months, we will be gathering information to see how they fared. Then we will report back as soon as we can.
It will be an interesting post.
- Investor Who Opted Out of Transamerica Settlement Files Suit, Donna Horowitz, The Deal, May 23, 2019