Pac Life Sued for Fraud in Class Action Over Deceptive IUL Sales
To read the class action complaint (a MUST read), click on the following link:
I’ve been warning about Pac Life’s PDX IUL policy for years. Those who listened won’t have to worry about the coming wave of lawsuits. Unfortunately, in 2019 the PDX policy was the #1 selling IUL. If you sold one, you better make sure your E&O is paid up.
To watch the warning webinar I did on Pac’s PDX IUL policy click on the following link:
Why did so many agents sell the Pac Life PDX IUL?
It illustrated the highest borrowing with by far the largest commissions. That should have been a tip that something was wrong.
Greedy and ignorant IMOs pushed this product on the same type of agents and now it’s coming home to roost. If an IMO recommended that you sell the Pac PDX IUL you should immediately start looking for a new IMO to work with. You might try www.advisorshare.com.
If you want to learn about my favorite IUL from a company that shouldn’t run afoul of the Pac Life issues, click on the following link:
What’s the Class Action lawsuit about? Three primary issues:
- What I call the black box-it’s where Pac calculates the returns and expenses in the policy. It’s a black box because they don’t disclose to agents or their clients how it works. They essentially say trust us. I don’t trust any company on information I can’t verify.
- The crazy high expenses of their internal bonus (which circumvented AG 49 which was put in place to curb abusive IUL illustrations).
Essentially, Pac took a low risk IUL policy, made it very risky with the HUGE bonus factor expense, and then stuck the consumer with all the risk. What’s worse is that they didn’t inform the consumer of this risk (and neither did most insurance agents selling it or IMOs pushing it).
- Illustrated rates Pac Life knew or should have known were unsustainable.
It is alleged that Pac should have known their ability to keep illustrated cap rates where they were when policies were issued the last several years were unsustainable. Because of the historically low interest rate environment we’ve had and the fact that Pac would be replacing older higher yielding bonds with lower yielding bonds, it was inevitable that cap rates would come down. Additionally, we’ve had a long period of low volatility in the markets which drive artificially low costs to hedge risk when buying options. That has changed which has increased costs to hedge and driven cap rates lower.
The example and text from the complaint are damning (and predictable).
A client was sold a Pac PDX IUL five pay at $500,000 a year for five years to a 52-year old ($2.5 million total). It was illustrated that the client could borrow out $175,000 a year starting in year six and that the policy would stay in force for life.
- The initial death benefit was $12 million and it was illustrated to be $18 million by age 80.
- The accumulated cash value was illustrated to be $13 million by age 80.
- The hypothetical illustrated rate was 6% (max allowed under AG 49).
Pac made it sound like the policy was being “illustrated conservatively” because it was only illustrating at 6%. This “concealed that the policy is the costliest and riskiest IUL product in the marketplace.” With a “Performance Factor of 4, the affective rate of return would have been more than 24%” (which is why it illustrated so well).
The PDX illustration did NOT disclose how the actual performance Factor Multipliers were derived or applied and their actual impact on the values depicted.
With an illustrated rate at 6%, the client was projected to have an account value of $5,147,596 in 20 years.
After paying the 2nd $500,000 premium the client became concerned due to the “exorbitant policy charges” amounting in a $54,286 loss for the reported period.
The accumulated account value DECLINED from $638,832 in October 26, 2019, to $593,907 on January 25, 2020. The surrender value after paying $1 million in premiums was only $360,567.
In-force illustration-the client was so concerned that she asked for an in-force illustration.
If the remaining $1.5 million in premiums were paid, the account value in 20 years would only be $2.353 million (less than the $2.5 million paid in premiums). This illustrates the insanity of using this type of policy which was projected at issue (two years earlier) to have over $5 million as an account value in 20 years.
Why was the projected account value so much lower? Because the illustrated rate fell from 6% to 4.92%. An 18% illustrated rate decrease equaled a 64% account value decrease. As alleged, this risk was NOT disclosed to the client.
Why did the illustrated rate fall? Because the general account revenue used to purchase options (which drives the cap rates) fell. This was foreseeable as alleged by the Plaintiff and is one reason to support their client’s claim of fraud and deception against Pac (also options costs increased as was foreseeable).
Moral of this awful story? Hang out with and get advice from industry insiders you trust. That does NOT include 99% of the IMOs in this industry who don’t do their due diligence and generally only care about maximizing revenue.
If thousands of advisors who receive my multiple warning newsletters about Pac Life (and Lincoln) would have headed my warning, they wouldn’t now be worried about being added to the class action lawsuit as a defendant.
For those who didn’t read my warning or those who did and ignored them, good luck and hope a process server doesn’t show up at your door before the statutes of limitations runs on your potential lawsuits.
Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society