Kyle Busch hits PacLife role in amended IUL fraud claims suit

Racing superstar Kyle Busch and his legal team filed an amended complaint Tuesday with more specific claims of alleged indexed universal life sales fraud by both the agent and Pacific Life Insurance Co.

Originally filed Oct. 14 in North Carolina state court, the lawsuit was moved to federal court in November.

According to the filing, the defendants used misleading illustrations, undisclosed costs, and false promises of guaranteed multipliers and controllable charges to induce Kyle and his wife Samantha to pay more than $10.4 million in premiums, resulting in net out-of-pocket losses exceeding $8.58 million.

The amended complaint digs deeper into the alleged culpability of PacLife, explained Robert G. Rikard, attorney for the Busches.

Extensive allegations

The amended complaint adds extensive allegations regarding the policy design choices used in the replacement, particularly the use of 100% base coverage with no renewable term and an increasing death benefit.

The filing alleges that these design decisions materially increased target premium, early policy charges, and compensation, while offering no corresponding accumulation or survivability benefit to the policyholder.

“What is new in the amended complaint is the level of Pacific Life’s direct involvement,” Rikard told InsuranceNewsNet. “This is no longer an agent-only case. We allege that Pacific Life distribution personnel actively assisted in structuring the replacement using compensation-intensive design choices the company already knows drive Target Premium and first-year commissions, specifically the use of 100% Base Coverage and an Increasing Death Benefit.

“Those choices are not accidental; they are compensation mechanics built into Pacific Life’s grid.”

It also details agent and defendant Rodney Smith’s use of internal 1035 exchanges that allegedly reset commissions and fees while presenting the transaction as a policy improvement.

A spokesman for PacLife declined comment on the amended complaint, but shared the insurer’s previous statement, which reads, in part:

“We stand by all our life insurance products, including Indexed Universal Life (IUL). An IUL policy provides valuable life insurance protection, helping ensure that families and other beneficiaries receive financial protection in the event of an unexpected or premature death of a loved one. IUL also offers the opportunity to build cash value over time, which may be accessed for a variety of purposes, including supplementing retirement income.”

'A financial trap'

The complaint accuses PacLife and its appointed agent, Rodney Smith, of designing and promoting a series of complex IUL policies as "tax-free retirement plans" that were misrepresented as safe, self-funding investment vehicles.

Kyle Busch was assured that by contributing a million dollars annually for five years, he could withdraw $800,000 per year starting at age 52, he said in a news release. Instead, Busch discovered his funds were being directed to the insurance company's account rather than being invested in the market, preventing his investment from growing as markets rose.

"I never thought something like this could happen to us," Kyle Busch said. "These policies were sold to us as part of a retirement plan, something safe and secure that would grow tax-free and protect our family long after racing. We trusted the people who sold them and the name Pacific Life. But the reality is far different. What was pitched as retirement income turned out to be a financial trap."

If sold ethically, most insurance professionals say IUL is a good fit for some clients. Unfortunately, IUL sales are often accompanied by misleading sales practices, complex fee structures, and performance that often falls short of the optimistic projections presented to consumers.

Questionable use of IUL

Critics argue that IULs are often mislabeled as secure retirement "investments" when they are, in fact, complex insurance products that transfer significant risk to the policyholder.

Victims of IUL schemes often discover years later that the "guarantees" and illustrations they were shown were based on assumptions that could never be sustained, Rikard has said. By then, escalating policy costs and vanishing cash values have erased years of savings.

In addition, the amended complaint alleges that Smith engaged in questionable “churning” with existing clients, replacing IUL policies with new ones from the same carrier.

These exchanges were allegedly structured to “restart compensation and internal production credit,” Rikard explained on his RP Legal website, even where the original policy had already generated “substantial commissions and bonuses within the carrier’s distribution system.”

Based on information uncovered in the Busch litigation, Rikard and RP Legal say they are investigating whether Smith engaged in similar 1035 exchange practices with other customers nationwide, “particularly where replacement policies were sold as upgrades or fixes without clear disclosure of the economic impact.”

"This case should concern anyone in the industry,” Rikard said. “What we are alleging here is not an isolated internal replacement. We are actively investigating a growing number of cases across the country involving similar 1035 exchanges that appear to reset compensation under the guise of policy improvement. We are also deeply troubled by how often we are seeing policies designed with 100% base coverage and no renewable term."

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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.