Life Insurance Litigation and Consulting
Most people buy life insurance without having any understanding of the policy they are buying. Many financial advisors do not adequately understand the product they are selling, and fail to properly explain how it works. There are many areas of complexity in life insurance that can lead to mistakes, misunderstandings, or worse.
Contestability Period
In most states, there is a two year period of contestability after issuance of the policy. During that time, if the insured dies, there will be an investigation to determine whether there were inaccurate or incomplete statements made on the application. Insurance companies have a legal right to conduct an investigation, and the beneficiary must cooperate). However, insurance companies will sometimes deny a death claim for misstatements on the application that are not material because they are unrelated to the cause of death. In those cases, the claim must be paid.
Types of Life Insurance
There are two basic types of life insurance: term and permanent. Term insurance lasts only for a specified period of time, and is temporary by nature. The terms are usually for 10, 20, or 30 years. The premiums are low because the likelihood of death during the term is very low. However, most term policies can be converted into permanent life insurance without further underwriting. “Permanent” insurance is intended to last for the lifetime of the insured. The premiums are much higher than term insurance premiums, and the policy usually has cash value.
There are also “accidental death” policies that pay benefits only if the insured dies as a result of an accident. They have no cash value, and the premiums are usually quite low.
Risks of Variable Universal Life Insurance
Variable Life Insurance or Variable Universal Life Insurance is a type of life insurance that allows the owner to invest money in securities that are similar to mutual funds and keep any gains without having to pay taxes. These policies are considered securities, and they are regulated by FINRA. They can make excellent retirement vehicles, but they can also lose money and lapse as a result. All such policies are sold with a prospectus that explains the risks involved. These policies have many attractive features, but are usually not appropriate for anyone with a short time horizon (less than 20 years), serious medical conditions that affect the premium and reduce the returns, or who has a conservative investment approach. We have also seen cases where large sums of money are concentrated into one type of investment subaccount without any diversification, where no appropriate compliance analysis was undertaken by the brokerage company that sold the policy, and where incorrect information was placed on the securities account form or policy application by the broker.
Improper Policy Design Causing The Policy To Lapse
Most modern life insurance policies have to be custom designed for the insured’s needs. Premiums in Universal Life Policies are “flexible”, allowing a lower initial premium than would be needed to sustain the policy over the insured’s entire lifetime. If a policy is not correctly designed by the financial advisor, the policy may be in danger of lapsing just when it is most needed. A financial advisor or life insurance agent who sells a policy that later lapses is not liable unless he or she failed to provide required documentation, made material misrepresentations, or designed the policy in such a way that it was doomed from the outset.
Wrong Owner of Life Insurance
If an insurance policy is owned by the insured person, the death benefit is part of the estate for estate tax purposes. One method of avoiding this problem is to have the policy owned either by the beneficiaries or by a special, irrevocable life insurance trust (ILIT). We actually seen cases where the policy was inadvertently issued in the name of a revocable, living trust, rather than an irrevocable life insurance trust. This would result in an estate tax that could defeat the entire purpose of the life insurance.
California Insurance License #0C61187 |