Life insurance policies are characterized as either term life insurance or permanent life insurance. Term insurance provides a life insurance death benefit for a specified time period without the accumulation of policy cash values. Permanent life insurance policies are designed to remain in force for the life of the insured through the accumulation of policy cash values which are used to defray the escalating rise in the cost of insurance as the insured’s mortality risk increases. In the beginning, permanent life insurance policy premiums are greater that the costs of insurance with the excess payments accumulated as policy cash values managed by the insurance company. The different types of permanent life insurance policies are:
- Whole Life;
- Universal Life; and
- Variable Life.
Whole and universal life policy cash values are invested in the life insurance company’s general account and are subject to the claims of life insurance company creditors which is an important reason why an insurer’s credit rating is important when investing in fixed life insurance products. Variable life insurance products are invested in accounts segregated or separated from the general account and are not subject to the claims of any creditors of the life insurance company.
Variable life insurance policies were first introduced to the investing public in 1976 and are considered a securities product regulated by the Financial Industry Regulatory Authority (FINRA). In a recent FINRA Investor Alert, Should You Exchange Your Life Insurance Policy?, regulators caution investors before they replace their existing life insurance policies with variable life insurance policies without have a complete understanding of all relevant factors, including:
- changes in insured’s health;
- taxes and commissions paid on transferred cash values;
- new surrender charges;
- extension of surrender period;
- new contestability period; and
- tax consequences.
Non-qualified retirement plans offered to key employees through businesses that are funded with life insurance products are generally suitable. The recommendation for an individual client to purchase large amounts of life insurance as a “retirement” plan, is generally considered unsuitable investment advice and raises serious questions of whether adequate disclosure was provided concerning sub account allocations, contract provisions, costs, taxation and suitability standards in accordance with securities industry standards. Taxable events can occur with variable life insurance policies, used to fund retirement income streams, that lapse on the amount that total withdrawals exceed the premiums paid to funds the policy.
The costs and forfeited benefits that result from the replacement of life insurance policies are often minimized or not disclosed which can result in a fraudulent misrepresentation and omission of material facts when the motive of the financial advisor’s compensation is taken into consideration. According to securities industry conduct rules, due to the complexities of variable life insurance policies, complete disclosure of all relevant costs and benefits need to be disclosed to investors to avoid any conflicts of interest.
The Silver Law Group can help you determine whether an investment loss from the purchase of a variable life policy is the result of a brokerage firm and their financial advisor’s violation of FINRA sales practice rules. If an investor suffers losses as a result of violations of securities industry conduct rules they may be able recover their losses in a FINRA arbitration claim.