Washington state couple sues Pacific Life over IUL illustration

A Washington state couple said they are out hundreds of thousands of dollars they expected to help fund retirement after being misled on a Pacific Life indexed universal life insurance policy.

Simona G. Marie and Thomas Lewis, from Richland, Wash., filed a lawsuit June 27 against Pacific Life, Harding Financial Partners and Andrew Brown, the producer who sold them a PacLife PDX life insurance policy.

Starting December 2017, plaintiffs made five premium payments totaling $505,000, the lawsuit states. Their investment gain added $248,650. The couple surrendered the policy in April 2022 and received a $202,655 check from PacLife. They claim the insurer made nearly $551,000 from the IUL contract.

Plaintiffs allege negligent misrepresentation, breach of fiduciary duty, professional negligence, breach of contract and violation of the Washington Consumer Protection Act.

The lawsuit references the ongoing IUL illustration controversy and efforts by state insurance regulators to tighten the rules and clamp down on unrealistic illustrations.

"PDX policies are extremely difficult for consumers and perhaps even brokers to understand," the lawsuit reads. "The sales illustrations overstate future performance and do not disclose key assumptions, including but not limited to PacLife’s so-called 'Performance Factor,' that produce extremely high fee costs and risks."

Pacific Life has not responded to the lawsuit and its communications department did not return an email seeking comment. Brown did not return a message seeking comment.

Although IUL is a controversial product, supporters say it offers greater upside potential, flexibility, and tax-free gains. Consumer advocates say it is a product that often leaves owners confused and disappointed with the results.

Long-term planning

Marie and Lewis were successful married business owners in 2017 and looking to do long-range retirement planning. They settled on a PDX policy with a "Performance Factor," paid with annual $200,000 premiums for five years, the lawsuit said. An illustration showed that the policy's non-guaranteed surrender value would be $1.86 million by year 19, when Marie reached age 67.

The Pacific Life policy included an alternate loan rider, a benefit distribution rider and a no-lapse guarantee rider.

"Simona Marie and Tom Lewis purchased the policy with the intent to provide them with income in retirement," the lawsuit said.

After making $200,000 premium payments in 2017 and 2018, Marie and Lewis decided to reduce their final three premium payments to $35,000. Brown indicated that the couple could reduce their premium in exchange for reduced financial benefits, including reduced annual income to $ 117,000 per year from ages 65 to 100, the lawsuit claims.

On Nov. 14, 2021, the couple made the final $35,000 premium payment. A month later, they joined Brown on a Zoom call to discuss their investment, the lawsuit said.

Instead, "Brown told Simona Marie and Tom Lewis -- to their surprise -- that the PDX policy benefit would go to zero because the contributions they had made to date would be inadequate to result in the projected policy benefit," the lawsuit said. "He told plaintiffs that in order to sustain the contract, they would have to make payments for years after 2022."

The couple say they were never told that the reduced premium payments could endanger their policy, or prompt additional premium payments. Marie and Lewis surrendered the policy in April 2022, paying PacLife a $45,000 surrender charge.

Actuarial Guideline 49

The plaintiffs claim that Actuarial Guideline 49 -- passed in 2015 by the National Association of Insurance Commissioners -- was intended to stop IUL illustration abuses.

"AG 49 set a benchmark rate based on annual returns on S&P 500 starting 66 years before the current calendar year and calculated using the geometric average for successive 25-year periods," the lawsuit noted. "In this way, AG 49 prohibited insurers from assuming higher crediting rates to pump up illustrated investment growth in IUL policies."

Insurers quickly got around AG 49 by offering IUL products with multipliers and bonuses. Pacific Life adopted its Performance Factor, the lawsuit said.

"The PDX Performance Factor was an unspecified non-guaranteed proprietary multiplier applied after policy year 3 as a factor to indexed credits," the lawsuit reads. "The Performance Factor inflated projected rates of return to IUL policy value, and thereby circumvented the S&P 500 index limitation."

The multipliers and bonuses eventually led to AG 49-A, adopted in late 2020 after this directive from an NAIC task force: "designs with multipliers or other enhancements should not illustrate better than non-multiplier designs." Again, abuses continued and regulators adopted AG 49-B, which took effect in May.

In a competitive IUL sales world with constantly changing regulations, the plaintiffs sought to paint the PacLife PDX as an especially egregious product.

"No IUL product in the industry contemporaneous with the PDX policy was riskier than the PDX policy," the lawsuit reads.

The lawsuit referenced a letter a group of insurance companies sent to the NAIC concerning unrealistic illustrations:

"PacLife is a sophisticated insurance company, and therefore either knew or reasonably should have known that other insurers, including MetLife, New York Life, Northwestern Mutual and OneAmerica submitted a joint position statement to the NAIC that explained that illustrations showing projected earnings of fifty percent annual returns, year after year, are the product of 'an unreasonable long-term assumption, which creates unrealistic consumer expectations.'"

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.