HERE IS A STORY
Mr. and Mrs., 74 and 72 respectively, purchased several life insurance policies over the years as part of their estate plan. The policies were variable life, which means that part of the premium paid covered the cost of insurance and the rest went into mutual funds to allow the policies to build up cash value over the years so that, at some point, they would no longer have to pay premiums to keep the policies in force, assuming a reasonable return on their investments.
THE PLAN WORKED
The plan worked for them. After 20 years their policies had significant cash value and, given a continued rate of return of 7%, the policies would sustain themselves and pay on death to a trust. The trust would benefit the surviving spouse and pay any remaining sums to their children. Both Mr. and Mrs. had policies on their lives to protect the other. The plan continued working well until an insurance agent contacted them and told them he could increase the amount of life insurance protection with no increased cost of insurance and without payment of any premiums. He proposed a tax free (i.e. no taxes would have to be paid if they cashed in the old policies) “exchange” of the old policies for new ones through a different company. There would be no insurance and the cash from the old policies would support the new policies. They bit. What a good deal, they thought. More insurance for the survivor, and it did not cost any more than they were already paying.
TOO GOOD TO BE TRUE?
Well, the old saying: “If it sounds too good to be true, it probably is,” was applicable to this bit of fraudulent conduct by the agent. What he did not tell Mr. and Mrs. is that, as a result of the exchange, the cash value of the new policies would be less than the old, and that it was likely these policies would lapse (because they would require a significant amount of new premium) within the next couple of years, well before either Mr. or Mrs. was likely to die. They were both in good health (otherwise it was unlikely that any new company would accept their application for the exchange). Why a diminished cash value? Because the new policies had a higher cost of insurance since the death benefit was increased, and there were surrender charges applied by the old company, which reduced the amount of cash going to the new insurer. Thus, there was less money to pay premium and also less money for the investment part, which was supposed to help continue to build cash value. There are also taxes and other charges for the new coverage and other negative features which make the exchange “unsuitable” for Mr. and Mrs.
In short, the agent should have never made the sale, nor should the new company have accepted the exchange because of this unsuitability and inappropriate replacement of the old policies for brand new ones. In California, what the agent and insurance company did violates our Insurance Code, section 785, which states that: “All insurers, brokers, agents and others engaged in the transaction of insurance owe a prospective insured who is 65 years or older, a duty of honesty, good faith, and fair dealing.” In addition, our Welfare & Institutions Code, section 15610.30, prohibits financial abuse of an “elder or dependent adult.” An “elder” is someone 65 years of age, while “dependent adult” is defined by the circumstances of financial or physical dependency.
The definition of financial abuse is lengthy, but, arguably, it covers the “twisting” of one insurance policy into a new policy using the cash value of the former, when this transaction is to the financial detriment of the insured or beneficiaries. It applies where the perpetrator “assists in taking [or] appropriating ¼ personal property of an elder or dependent adult ¼.”
FINANCIAL ELDER ABUSE
What the agent and the insurer did here is a form of financial abuse, which occurs when a victim is spotted who has significant cash value in older life insurance policies which have built up over the years. If you or someone you know is in the position that I have described in this article, be sure to alert them to the possibility of an unscrupulous insurance agent attempting to move the cash out of the older policies to newer ones. Any proposed transfer of cash should be reviewed carefully. In most cases, it will not be suitable, but a determination by an independent financial advisor, such as a CPA or certified financial planner should be completed before agreeing to make the exchange. And, if this has already happened, or you suspect it has to a loved one or friend, call our office for a free consult. There are legal remedies available in California for those who suffer this form of financial elder abuse.