Life insurance is not only a way to protect your family in the event of a serious accident, sickness, or catastrophe. For many, it is also a smart financial product that can contribute positively to your portfolio. A financial advisor can help you select the right life insurance for your circumstances. However, as experts in a complex field, some financial advisors also make recommendations that primarily serve their own interests.
If you have been taken advantage of by a financial advisor, a life insurance fraud attorney may be able to help you seek relief. Wolper Law Firm has a 99% success rate in recovering funds for defrauded clients. Contact us today for help with life insurance fraud cases.
What Are the Types of Life Insurance?
There are different kinds of life insurance for investors’ needs. Some forms of life insurance offer a savings component or other benefits besides simply offering benefits after a death.
Term Life Insurance
The simplest and most common form of life insurance is term life insurance, which provides coverage for a fixed amount of time. The death benefit is also fixed. Once the Term Life Insurance policy reaches its expiration date, the insurance company no longer has an obligation to pay death benefits. This type of life insurance is often best suited for younger individuals, especially those beginning a family, due to its cost-effectiveness.
Whole Life Insurance
Whole life insurance policies are a kind of permanent life insurance, meaning that a client receives coverage for their entire life rather than a set period of time. These policies pay death benefits based on the face value of the insurance policy, plus any appreciation of cash value. In addition to the death benefit, whole life insurance policies have a savings component that will grow, tax-deferred, based on the level of premium payments made by the insured. In order for the cash value to grow, an insured is required to add premium.
Dividends are also paid by the insurance company each year and can be used to either purchase additional life insurance or increase the cash value. Insureds are free to withdraw cash value from their whole life insurance policy in the form of a policy loan. If the loan is not repaid before death, it will become an offset against the death benefits ultimately paid. Whole life insurance might be recommended as part of a larger estate plan to a client looking to build out their financial portfolio.
Universal Life Insurance
Variable universal life insurance (VUL) or universal life insurance (UL) are also forms of permanent insurance that are less expensive than whole life insurance. With VUL or UL policies, insureds have the flexibility to increase or decrease death benefits at any point in time. The VUL and UL policies also have a savings component wherein an insured can accrue cash value. Unlike whole life policies, which have a fixed rate of return, VUL and UL policies can be invested more aggressively so that the cash value increases more quickly. VUL and UL policies are often invested in a stock index or basket of mutual funds. Of course, this exposes the sub-accounts of the VUL and UL policies to market risk and could require the insured to contribute additional premium to keep the policy in force long-term.
UL policies may be some of the most flexible options, but they are also among the most complex. UL policies should be approached cautiously, because they may involve terms or conditions that can leave investors in debt. Additionally, there are certain waivers and riders such as waiver of cost of insurance, accelerated death benefits, and more that can be added to UL policies. These may increase their value as an investment tool but decrease their utility overall. UL policies are often recommended to those seeking to promote their long-term financial goals like putting a down payment on a house, launching a small business, or building up retirement savings.
Why Do Financial Advisors Sell Life Insurance?
Life insurance is a key part of a person’s overall financial planning, and an advisor can play a useful role in helping you make decisions accordingly. A financial advisor who helps you select the appropriate life insurance policy is acting responsibly, helping protect your family and your wealth in the event of a disaster. However, financial advisors selling permanent life insurance will benefit to some degree from your investment. This is not to say that all financial advisors have an ulterior motive, but only that you as a client should be aware that there are financial incentives at play that can motivate your advisor’s recommendations.
Financial advisors sometimes recommend whole life insurance, VUL, and UL because the commission structure is lucrative. Insurance companies will pay a significant percentage of the first-year premium and a trailing commission for each year thereafter. For this reason, financial advisors recommend that clients “roll over” IRA accounts, annuities, and other investment accounts into these permanent insurance products so that there is a large, lump-sum contribution from which their commission is calculated.
What is Life Insurance Fraud by Financial Advisors?
High commissions can be a powerful incentive to commit fraud. When your advisor misrepresents the risks or benefits of a life insurance product to serve their own ends, they are committing fraud. Most advisors have a fiduciary duty to only recommend appropriate financial products to their clients. The profit motive should never come before your own best interests as an investor.
Life Insurance Fraud Red Flags
The following can be indicators that your advisor is committing or attempting to commit life insurance fraud. It’s important to know how to recognize these red flags early and halt the damage before it goes too far. If you have concerns or have noticed any of the following behavior from your own financial advisor, speak to a life insurance fraud lawyer for a consultation.
They Use High-Pressure Sales Tactics
An advisor who insists on a quick decision, doesn’t let you do your own research, or who is defensive or evasive when you ask questions may be trying to scam you. Make sure you fully understand what you are investing in with a financial product. An advisor who is above board will want to help you assess both the pros and the cons. They will leave you time to consider and can provide documentation to back up their claims.
They Put Too Much Emphasis on Permanent Life Insurance
If an advisor insists that you purchase a permanent life insurance policy without even addressing term options, it may be a red flag. You should be especially careful if your advisor refuses to disclose their commission.
They Claim a Policy Can Generate “Income”
Financial advisors may claim that you can generate “income” from accrued cash value under a permanent life insurance policy. This is a misleading statement. Permanent insurance products do not pay income. In order for investors to access the cash value, they must take a loan against the policy, which has to be repaid. If the loan is not repaid, it becomes a liability against the death benefit.
Moreover, permanent insurance products are designed so that the cash value can eventually help pay some or all of the premium payments required to maintain the insurance policy. If there is a policy loan that is not repaid, the cash value will be insufficient to pay future premium payments. If this occurs, investors will have to contribute more money to the permanent insurance products or risk a complete lapse in the policy and loss of their principal investment and death benefit.
In other words, taking policy loans for so-called “income” will inevitably cause the policy to erode in value and become much more expensive to sustain. It will also cause the policy to lapse if the loan is not repaid or additional premium is not added.
They Want You to Switch From An Existing Policy (And They Don’t Mention the Risks)
Insurance twisting and insurance churning are two common methods that untrustworthy advisors use to make a quick buck, which involve convincing clients to change an existing policy unnecessarily. Your advisor should help you fully review the risks of switching policies. There can be a lapse in coverage, surrender charges for canceling, or other downsides to the change. In extreme cases, advisors have been known to recommend that investors secure policy loans in order to establish new insurance policies. This can leave you both in debt and without genuine coverage.
They Suggest Premium Financing a Policy
Premium financed life insurance involves using a third-party loan to pay policy premiums. In this type of arrangement, the lender covers the premiums, and you pay interest on the loan, which is typically repaid after a set period. Ideally, the policy’s cash value growth is enough to repay the loan. This can be a risky strategy, however, because if interest rates rise or the policy underperforms, you may require additional collateral. Failure to meet this requirement can result in default and the lender halting premium payments.
FINRA Guidance Regarding The Sale Of Life Insurance Products
FINRA recognized the risks of life insurance scams many years ago when it issued Notice to Members 00-44. This highlights the following considerations for recommending life insurance:
- A FINRA member should consider whether the customer desires and needs life insurance and whether the customer can afford the premiums likely needed to keep the policy in force.
- Special supervision requirements are recommended for life insurance sales to older customers. Variable life insurance may not be suitable for an older investor who is primarily seeking an investment rather than an insurance product. Additionally, FINRA members should carefully consider whether an older investor has the financial means to sustain the likely amount of policy premium payments.
- Registered representatives should be thoroughly familiar with the features and costs associated with each recommended variable life insurance policy. These include surrender charges, premium and cash value charges, separate account charges, underlying fund fees, subaccount investment options, loan provisions, free-look periods, and policy premium lapse periods. The registered representative also should be able to clearly convey such information to the customer so that the customer can make an informed investment decision regarding the recommendation.
- FINRA members should not recommend that a customer finance a variable life insurance policy from the value of another life insurance policy or annuity, such as through the use of loans or cash values, unless the transaction is otherwise suitable for the customer. The NASD believes that the burden of demonstrating that such financed transactions are in the customer’s best interests would generally be more difficult than for a routine sale of variable life insurance. In the Pruco case, many customers’ existing cash values were depleted to pay the premiums of new policies. The new policies lapsed when the required premium for the new variable life insurance policy exceeded the dividend stream or cash value of the original policy.
What to Do if You Have Been Improperly Sold a Life Insurance Product
If your Financial Advisor recommended that you invest in permanent insurance products, and you believe that he or she may have sold those products to you without full disclosure of the characteristics and risks, you may be able to recover your investment losses by filing a FINRA arbitration claim. An arbitration claim takes place before a panel of third-party industry experts. While the process resembles a courtroom trial before a jury, FINRA arbitration is often a lower-cost and faster way to resolve a fraud claim involving a registered financial advisor.
Should I Hire a Life Insurance Fraud Lawyer?
You can represent yourself during FINRA arbitration or mediation, but you may also choose to be represented by a life insurance fraud lawyer. These proceedings are complex matters that often involve highlighting different areas of industry regulation as well as similar award decisions. Your brokerage firm will most likely be represented by a team of attorneys who have been hired to protect their interests, therefore it is often recommended to have your own legal counsel.
It is also highly recommended to obtain professional legal services before embarking upon a FINRA arbitration effort because appealing a FINRA decision can only be done under limited circumstances. It is therefore imperative to present the facts of a life insurance fraud case as accurately and compellingly as possible, as well as to file correctly, in order to maximize recovery. Failing to do so can bar your path to future recovery entirely.
Speak With a Life Insurance Fraud Attorney at Wolper Law Firm
Wolper Law Firm offers skilled and effective representation to investors who have been defrauded by life insurance scams. Our attorneys come from some of the best law schools in the United States and have years of trial experience in financial fraud claims. We bring our precise attention to detail, legal expertise, as well as compassionate representation to each of our client’s cases. Contact the Wolper Law Firm, P.A. for a free consultation to discuss your legal rights.