Transamerica pays $195 million to settle lawsuit over universal life insurance

Suit alleged the insurer improperly increased monthly costs to avoid guaranteed monthly interest payments

Oct 4, 2018 @ 1:34 pm

By Ryan W. Neal

Transamerica Life Insurance Co. will pay $195 million to settle a class-action lawsuit alleging the company improperly increased the monthly charges on 70,000 universal life insurance policies.

According to Harvey Rosenfield, an attorney with Consumer Watchdog who represented the plaintiffs, Transamerica notified policyholders in 2015 that it was increasing charges by as much as 38% on universal life insurance packages originally sold in the late 1980s and early 1990s.

This meant some consumers entering retirement were forced to choose between losing the policy, which promised monthly interest payments of at least 5.5% annually, or paying the higher premiums, Mr. Rosenfield said.

"The charges that Transamerica applied to people who owned these universal life insurance policies caused tremendous surprise and stress for the people who received them, many of whom are now senior citizens, and some of whom are quite elderly and on fixed incomes," he said in a statement.

Universal life insurance allow buyers to make flexible premium payments to fund policies with a relatively low amount of premiums. Many of the policies were sold during a period of high interest rates, which allowed insurers to offer attractive guaranteed minimum interest rates.

(More: Universal life insurance lawsuits underscore product risk)

Transamerica said in a statement that the policies permit the company to adjust monthly deduction rates up to a contractually guaranteed maximum, and that the increase was "necessitated by low long-term interest rates, changes in expectations as to future mortality experience, and other factors, and in accordance with the policies' contractual terms."

However, the plaintiffs argued Transamerica had breached its contract and acted in bad faith by raising charges as a pretext to avoid or offset its obligation to pay the guaranteed monthly interest. Mr. Rosenfield also alleges Transamerica wanted policyholders to relinquish their life insurance so the firm could recoup losses it sustained as a result of low interest rates.

In addition to Consumer Watchdog, the case was prosecuted by attorneys from two law firms with a history of life insurance litigation: Bonnett Fairbourn Friedman & Balint and Shernoff Bidart Echeverria & Bentley.

"Our number one goal was to get as much money as we could back to these policyholders as quickly as possible," Mr. Rosenfield said. "It took two years of hard-fought litigation, but we have accomplished our goal."

(More: Transamerica sued for cost increases on universal life insurance contracts)

Under the terms of the settlement, Transamerica will pay into a common fund and absorb the attorneys' fees. Policyholders who participate in the settlement will receive a monetary award — either through credits to policy account values or in cash for policies no longer in force — and protection from any additional increases in the monthly deduction rate for five years.

Dick Schiethart, senior spokesperson for Transamerica parent Aegon, said the company is "satisfied with this settlement because it will make an end to the uncertainty for our customers."

Axa Equitable Life Insurance and Lincoln National Corp. are also facing litigation for raising the costs of their universal life policies. Nationwide privately settled a case in May relative to variable universal life insurance costs, and John Hancock Life Insurance Co. settled a lawsuit in July for $91.25 million.

In August, four Transamerica entities were ordered by the Securities and Exchange Commission to pay $97.6 million for misconduct related to faulty investment models.

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