Texas lawsuit: Lincoln Financial annuity fell far short of illustration promises

A Texas lawsuit claims that Lincoln Financial sold nine plaintiffs a fixed indexed annuity with illustrated promises of big gains that never materialized.

The group of nine plaintiffs seek class-action status and are suing both Lincoln and Fidelity Product Services, provider of the index upon which the Lincoln FIA is linked. Initially filed in Dallas County court, the defendants successfully petitioned to move the lawsuit to the U.S. District Court for the Northern District of Texas.

Plaintiffs say they signed a fixed indexed annuity contract with Lincoln in February 2020 expecting the consistent 6% gains illustrations showed. FIAs are popular with consumers because the 0% floor means they cannot lose money.

The FIA was tied to the 1-Year Fidelity AIM Dividend Participation Index. The plaintiffs say their actual returns were zero or near-zero for several years.

"Lincoln marketed this product aggressively to its agents, brokers and customers," the lawsuit reads. "Lincoln started a campaign of misrepresentation amongst its agents and brokers about the new 'Lincoln and Fidelity partnership' trading on both the reputation and name of Fidelity ... and pumping the prospect that a newly licensed product from Fidelity could provide significant financial upside to clients."

The lawsuit further claims that plaintiffs' funds were moved out of the index and into Treasury securities after the market collapsed briefly in March 2020. The market rebounded quickly from that COVID-19-influenced setback and exceeded a 16% return by the end of 2020.

However, the plaintiffs' funds were "never moved back to a blend of dividend stocks and bonds as disclosed until later in 2021, if ever," the lawsuit reads.

Lincoln and Fidelity officials could not be reached for comment. The defendants have not responded to the lawsuit, other than to ask for, and receive, an extension from the court until May 8.

Lincoln touted an increase in annuity deposits during a quarterly earnings call in February.

Illustrations under fire

Plaintiffs are alleging fraud and negligent misrepresentation and ask the court for compensation. The lawsuit calls the FIA losses, "significant and meaningful damage for retirees and individuals living on a fixed income that looked to the defendants to provide not only a place for protection of their principle, but an opportunity for growth potential."

The Texas lawsuit comes as the National Association of Insurance Commissioners flirts with a full-scale revamp of the overall life insurance illustration model. The problems with life insurance and annuity illustrations all lead to the same spot: the use of proprietary indexes, most of which do not have extensive performance histories.

In lieu of real performance, insurers are back testing components of their indexes to create a history. This practice has regulators concerned.

There have been several lawsuits filed against FIA insurers, all alleging that real-life returns fell well short of what was illustrated at the time of sale. Plaintiffs are seeing mixed results for those lawsuits.

Notably, lawsuits against Security Benefit Life Insurance Co. over its FIA and index continue to generate conflicting rulings.

Last month, the 10th U.S. Circuit Court of Appeals ruled 2-1 to revive the proposed class action alleging Security Benefit engaged in fraud and racketeering by misleading investors in its Secure Income Annuity and Total Value Annuity products.

U.S. Judge Veronica Rossman wrote that a Kansas judge who dismissed the case in 2021 failed to consider the complaint as a whole, which alleged the company concealed the "collective impact" of the terms of the annuities, Reuters reported.

U.S. Circuit Judge Harris Hartz dissented, saying the decision would require sellers to not only disclose the risk of investments, but to analyze "whether, given the disclosed facts, the investment is a good one."

Similar allegations

The Security Benefit allegations are similar to the Texas lawsuit against Lincoln: plaintiffs say Security Benefit manipulated clients to invest most of their fixed indexed annuity account values in the company's synthetic index, which performed far worse than portrayed.

"Security Benefit’s aggressive tactics and misleading sales scheme yielded immediate financial rewards for Security Benefit and its parent, Guggenheim Partners," the lawsuit reads.

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.