Attorney rips insurers, agents over ‘incredibly complex’ IUL-focused plans

Attorney Robert Rikard is five years into a legal odyssey on behalf of clients who were sold what he calls an inappropriate indexed universal life (IUL) product.

To top it off, some of his plaintiffs were sold a funding mechanism that turned out to be a Ponzi scheme.

Rikard, half of the Rikard & Protopapas law firm in Columbia, S.C., has three cases in South Carolina state court. He is hopeful that all will go to trial by the end of the year, providing some resolution for clients who regret signing up for a big-dollar IUL product.

“Pacific Life has refused to do the right thing for its policy holders for years, so now we will ask a jury to do it for them,” Rikard said.

The clients and their experiences are more than just business for Rikard, who is speaking out against IUL sellers. He joins a ever-louder chorus of critics who say the products and the way they are sold constitute financial malpractice.

“Almost all of these people are either retired or about to retire,” Rikard said of his clients. “This plan was sold to them as a retirement plan. They were encouraged to move money out of qualified retirement accounts to the IUL as a retirement vehicle. And the policies have either lapsed or are on their last leg at this point because they can't afford to make more premium payments and the policy charges and expenses are wiping out their cash value. ”

Rikard was on the winning side of a recent, related IUL case in Idaho. In May, a jury ordered Pacific Life Insurance Co. and an insurance agent to pay Karen Shelstad $1.5 million for the economic losses she suffered relating to a failed retirement strategy involving an IUL policy.

Idaho District Judge Randall S. Grove granted PacLife summary judgement on Shelstad’s negligent representation claim “because Idaho does not recognize a tort of negligent misrepresentation.”

Otherwise, Pacific Life claimed that it cannot be held responsible for the agent’s actions because Shelstad’s economic losses were due to actions taken by the agent before Pacific Life appointed him as a producer. Grove rejected that argument.

Future Income Payments

Now retired, Shelstad was 69 years old when she was persuaded to invest $1.8 million in an IUL premium financing plan over seven years, Rikard said. The plan called for Shelstad to take out policy loans on which she would not pay income taxes because those loans would not be considered income.

The loans would function as Shelstad’s retirement income for the remainder of her life, according to illustrations presented to her. The second part of the plan called for Shelstad to invest $1.4 million, her entire retirement nest egg, into a “structured settlement” offered by Future Income Payments.

That turned out to be a nationwide Ponzi scheme that earned FIP founder Scott Kohn a 10-year prison sentence.

Using various marketing efforts, FIP solicited pensioners by offering them a lump sum in exchange for a portion of their future pension payments. FIP called the practice “structured cash flows” and the company used brokers and insurance producers to find investors – often retired veterans, teachers and firefighters.

Unknown to many investors, the future pension payment terms required them to pay what often equated to an annual interest rate exceeding 100% over a five-year term.

In time, another layer was added to the scam, prosecutors said. Investors were urged to fund IUL policies with their FIP payment, ostensibly to replace the pension as a retirement plan. However, prosecutors said the new layer just created another opportunity for rogue agents and FIP reps to further gouge investors through hidden and high fees.

Some of Rikard’s South Carolina cases also involve FIP funding. Hundreds of IUL policies were sold via the FIP funding, leading to dozens of lawsuits and the bankruptcy of one prominent Arizona independent marketing organization.

‘Agents have to be educated better’

Most of the questionable IUL strategies involve policy loans and or inflated illustrations, often both. Rikard has experts who testify to the recklessness of the plans.

“Experts that have worked for me who have either sold these products or looked at these products say it really is just a small sliver of the public that should be sold an IUL product,” he said. “Agents have to be educated better on the fact that if you're going to recommend an IUL it has to be a small slice of a much-larger, well-allocated asset portfolio. The IUL cannot be100% of a client’s life savings.”

IUL sales are sealed with illustrations and efforts continue to clean up the practice. The combination of agents who often don’t fully understand the product and an unrealistic illustration is frustrating regulators and consumer advocates alike.

Actuarial Guideline 49 was adopted in 2015 to address IUL products created after the original 1997 illustration model was adopted. Insurers quickly got around it by offering IUL products with multipliers and bonuses.

That led to AG 49-A in 2020 and eventually, AG 49-B. Regulators referred to the latter update as “a quick fix” when adopted in 2023. Regulators have repeatedly shied away from an overall illustrations rule rewrite.

“These products are just incredibly complex,” Rikard said. “When you get into the weeds with these agents, they really don't understand how these products work. They're simply relying on the illustration to sell the product and the illustration is the best-case scenario if every single thing in that illustration works correctly.”

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.