The suit, filed Aug. 6 in Superior Court in California’s Orange County, charges Pacific Life with fraud, deceit and misrepresentation over sales of its popular Pacific Discovery Xelerator product.
The California-based plaintiff to the suit, Hong Li, alleges that the insurer touts investment returns in illustrations and marketing literature that don’t hold up in the real world.
The indexed universal life insurance also includes excessive charges and risks to illustration performance that are not disclosed, the complaint states. The suit additionally flags a performance factor, or multiplier, that “fraudulently inflated the illustrated performance” of the policies.
Some of the accusations echo those made by consumer advocates that have criticized indexed universal life insurance for too-rosy illustrations of future performance. If Pacific Life loses the case, it could lead to other products being targeted in lawsuits, because Discovery Xelerator is a major “progenitor” of other indexed universal life policies, said Bobby Samuelson, editor of The Life Product Review.
He also noted that the law firm bringing the legal action has previously won settlements from insurance companies.
“This isn’t some fly-by-night operation or fishing expedition,” Samuelson said. A spokesperson for Pacific Life said it doesn’t comment on pending litigation.
‘King’ of Multiplier Products
The suit charges that Pacific Life designed the multiplier that credits investment gains in the policy with a view to evading the National Association of Insurance Commissioners’ Actuarial Guideline 49. Instituted in 2015, the guideline sets out rules for how insurers can illustrate the performance of indexed universal life insurance over time.
Pacific Discovery Xelerator and other complex indexed universal life products that use performance factors to generate high illustrated returns have been at the center of a heated debate over revisions to the guideline. Last month, the NAIC’s life insurance and annuities committee voted unanimously to adopt a proposal supported by the American Council of Life Insurers.
But the proposal, an amendment to the guideline labeled AG 49-A, doesn’t do enough to align illustrations with actual product performance, in part because it lets insurers suggest that buyers can earn high returns without a commensurately high risk, critics charge.
During a Beacon 2020 virtual conference session held last month, Larry Rybka, CEO of broker-dealer Valmark Financial, said rates of return that carriers use in illustrations are unsustainable and represent “another potential black eye for the industry.” He warned that consumer anger over product illustrations might prompt Congressional intervention, potentially leading to an “end of state regulation of insurance.”
Regarding the Pacific Life lawsuit, Rybka told Life Annuity Specialist that PDX is the “king of the multiplier products.”
“I think they lay out in that lawsuit a lot of the reasons we needed changes to AG 49,” he said. He said he’s surprised there hasn’t been a previous major lawsuit involving an indexed universal life product, especially considering that many customers take out loans to purchase the policies.
Litany of Charges
The complaint alleges that Pacific Discovery Xelerator’s performance factor, which applies index credits after the third policy year of the contract and is guaranteed to have a value of not less than one, is “an illusory guarantee permitting PacLife to unilaterally eliminate any positive impact of the multiplier,” as the insurer can change the value at its discretion.
Despite the multiplier’s potentially huge impact on policy performance, Pacific Life leaves consumers in the dark about its underlying mechanics, the complaint alleges.
“Nowhere in the PacLife illustrations or in the PDX uniform marketing materials or policy forms is the Performance Factor explained or defined, is the formula used to determine the Performance Factor described, or is the value of the assumed Performance Factor disclosed,” the document states. The Performance Factor is “intentionally misleading and deceptive,” it says.
The complaint adds that Pacific Life applies undisclosed policy charges to the purchase of call options that power the performance factor. Though varying in cost with interest rates and other market factors, these call options are assumed to always generate profits of 50%.
The high charges and option trading profits “create a tremendous degree of leverage” in the product, resulting in “enormous undisclosed risks – including substantial market risks” to the performance of the policy, the suit claims.
Policyholders could even end up with negative investment returns that might force their policies to lapse unless they pay substantially more in premiums, according to the complaint. The scenario is at odd with Pacific Life’s “false representations that there is no downside risk” to the products, the complaint states.
Product illustrations, it adds, are misleading because consumers are led to believe that projected double-digit returns are based on a disclosed interest crediting rate of about 6%. In fact, the returns are “juiced by the undisclosed performance factor multiplier,” making the product the riskiest index universal life insurance on the market, it says.
The complaint adds that sales agents are incentivized to allocate death benefits to a coverage option that adds two more dollars in policy charges for each additional dollar in agent compensation. Pacific Life, the document asserts, does not disclose these additional charges in its illustrations.
The seven-count indictment charges Pacific Life with violations of the California Business and Professions Code, fraud, deceit and intentional misrepresentation, as well as negligent misrepresentation. Additional allegations are leveled against the insurance agent, Tiffany Xu and Sky Vision Insurance Agency, which were involved in selling the policy to Li.