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Losses Stemming From Indexed Universal Life Insurance Policies

Indexed universal life insurance policies are often heavily marketed to people looking for a life insurance product with an investment component. Many insurance providers and brokers make promises that those who purchase indexed universal life policies will benefit from profitable investment opportunities. Unfortunately, these policies rely on the stock market growth in order to provide the promised returns to investors — and of course, stock market growth does not always occur.

Investors could not only find themselves facing unexpected investment losses when they thought they were making a safe investment, but they could also end up stuck with policies that are reassessed each year so their policy premiums continually rise.

Family members often do not find out that indexed universal life policies fail to provide the promised returns on investments until after the policyholder has passed away. Policyholders may also discover their investment has lost value when they want to cash out or trade-in their policy for the cash value. When either of these things occurs and you are left dealing with financial loss due to the purchase of an indexed universal life policy, you should consult with California securities fraud lawyers to find out what options you have for recouping losses and holding insurers and financial advisors accountable for policies that failed to provide promised benefits.

More About Universal Indexed Life Insurance Policies

Many of the biggest insurance companies in the insurance market offer indexed universal life insurance policies, sometimes claiming that these policies are the perfect purchase for those who want to find a safe investment that will allow them to earn income and take care of their loved ones ones when they pass away. Some insurers that sell universal indexed life insurance policies include:

  • Pacific Life
  • Aviva
  • Athene
  • Accordia
  • Minnesota Life
  • Aegon USA
  • National Life Group
  • Penn Mutual
  • Old Mutual Financial
  • Midland National Life
  • Allstate Life
  • NACOLAH Life
  • Transamerica
  • Nationwide
  • Voya

While not every policy is fraudulent, many insurers fail to adequately disclose downside risks and the potential for rising premiums when policies are reassessed annually.

When universal indexed life insurance policies are sold, owners are given the chance to decide the amount of their investment that will go to fixed portions and indexed portions. Indexed portions of accounts are invested in popular equity indexes, including the NASDAQ or the S&P.

Providers typically guarantee the principal amount that is invested in the fixed portion while capping returns that can be earned on index funds in investment accounts. These policies are considered hybrid policies and they are typically offered as lower-cost policies that allow investors a secure way to benefit from market returns without facing downside risks. Unfortunately, this is not the reality.

It can come as a shock to many to find out that the policy does not have the promised value, and untangling what happened can be a challenge as policyholders or their families look through paperwork to try to determine what was invested and what was put into fixed portions of policies.

What Is Indexed Universal Life Insurance?

There are two main types of permanent life insurance (as distinguished from term life insurance):  

  • Whole life insurance: Whole life insurance covers the insured for his or her entire life, with no expiration date. With this type of insurance policy, the insurance company puts a portion of the insured’s premium into a high-interest bank account that accrues cash value with every premium payment received. The insured may then borrow against that cash value or surrender the policy to obtain the cash value. The insured’s premium payments and death benefit remain fixed for the duration of the policy. 
  • Universal life insurance: Universal life insurance is similar to whole life insurance, except that a portion of the insured’s premiums goes into an investment account, with the interest gained credited to the account’s cash value. This cash value may then be used to pay the policy’s premiums. Universal life insurance policies offer more flexibility than whole life insurance policies because they allow the insured to adjust his or her premiums and death benefits. 

An indexed universal life insurance policy is similar to a regular universal life insurance policy, except that the cash value the policy earns is based on the performance of an underlying stock market index (such as the S&P 500 or Dow. Jones), which can allow significantly greater returns than with a fixed-rate universal life insurance policy. 

Benefits of Indexed Universal Life Insurance

Indexed universal life insurance can be an attractive option for many because it combines the features of a standard life insurance policy with the higher growth potential of a stock market investment. There are several benefits that come with using indexed universal life insurance, such as: 

  • Flexibility: Indexed universal life insurance policies allow an insured to customize a policy to meet his or her specific needs by adjusting the amount of premiums and death benefits. 
  • High growth potential: The interest rates of IUL insurance policies are typically much higher than those of fixed universal life insurance policies, which allow the holder to accumulate greater returns on his or her cash value. 
  • Tax-free: Indexed universal life insurance holders do not pay capital gains taxes on the increase in the cash value of their policies, allowing them to withdraw funds from them without a tax penalty.
  • Cash value availability: Indexed universal life insurance policies allow their holders to access their cash value in the form of withdrawals and loans, which may also be tax-free. Cash value may also be used to pay the policy’s premiums. 
  • Low investment risk: Indexed universal life insurance policies typically have a guaranteed rate of return, which protects the holder’s investment from any losses in the stock market. 

Please note, however, that indexed universal life insurance is not an appropriate investment for everyone. Therefore, if you are considering an indexed universal life insurance policy, speak to a California securities fraud lawyer first. 

Downsides of Indexed Universal Life Insurance 

Indexed universal life insurance policies come with plenty of risks and other downsides, such as: 

  • Cap rates: While indexed universal life insurance policies protect their holders from losses on the particular index to which they are tied, they also have upper limits — or cape rates — on the amount of returns they may generate. For example, if the policy is tied to the S&P 500 with a cap rate of 10%, any time the S&P returns more than 10%, the insured still gets only 10%. 
  • They don’t count stock dividends: Stock market returns are generally composed of index values and dividends. For example, if a particular index is “returning 10%,” that may include an 8% chance in index value and 2% in dividends. Indexed universal life insurance policies pay only on changes in the index value.
  • Fees: Indexed universal life insurance policies typically come with numerous fees that can detract from their rate of return, including premium expense charges, riders, commissions, and administrative expenses. If there is a severe downturn in the policy’s index, the fees alone can deplete the policy account value and cause a risk of lapse. The insured must then pay additional premiums to keep the policy in force. 
  • Increased premiums: Indexed universal life insurance premiums increase over time. If the insured can no longer pay them, they risk losing all previously paid premiums.
  • Lax regulatory oversight: Indexed universal life insurance policies have many features in common with investment products, but they are not regulated by the U.S. Securities and Exchange Commission, leaving their regulation up to state law. 

The risks of indexed universal life insurance can significantly temper their benefits and may even end up costing the policyholder in the long run. If you have lost money through the use of indexed universal life insurance, please contact a California securities fraud lawyer

Indexed Universal Life Insurance Carries a High Risk of Fraud

Indexed universal life insurance is a significantly more complex insurance product than typical whole life or universal life insurance policies, and complexity generally does not favor the consumer. The more moving parts an insurance policy has, the less likely the insured will fully understand its risks. This creates fertile ground for insurance fraud. There are many types of insurance fraud unscrupulous brokers and scammers can perpetrate on their clients, including: 

  • Misrepresentations and omissions about the policy’s terms
  • Inflated claims about the policy’s cash value rate of return 
  • Charging excessive fees
  • Refusing to pay claims in accordance with the policy limits
  • Failure to apprise clients of the risks of a policy 

The elderly are at a particularly high risk of fraud linked to indexed universal life insurance. This could occur, for example, where an insurance broker coerces or otherwise pressures a senior into purchasing an inappropriate life insurance product when the broker knows a different type of life insurance would better serve the senior. In some cases, this type of fraud may even rise to the level of financial elder abuse. In situations such as those, you should consider contacting a California securities fraud lawyer who can help you protect your assets.

Contact a California Securities Fraud Lawyer Today 

At Evans Law Firm, Inc., our securities fraud lawyers can help determine if you faced losses due to unscrupulous insurance advertising or investment fraud in your indexed universal life insurance policy. Call 415-441-8669 or toll-free at 888-503-8267 to learn more.

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