Merrill Lynch the Latest Example of Life Insurance Suitability Hindsight...Are You Ready?
Because life insurance was largely exempt from the standards-of-care now set forth in the Uniform Prudent Investor Act (UPIA), life insurance sales practices had largely ignored the standards for suitability applied to most all other financial products. However, with the adoption of UPIA in 44 States, an increasing number of clients (and/or plaintiff attorneys) are now beginning to apply such suitability standards and often with the benefit of hindsight.
This trend towards suitability testing of life insurance products is certainly causing problems for some (as we will see below) and presenting opportunities for others (i.e., those who use empirical product research as a competitive advantage against those who don't). For instance, in the most recent example of suitability testing of life insurance products, "retired Merck CEO Ray Vagelos is suing Merrill Lynch for fraud in connection with life-insurance policies" he was sold, according to an article in The Star Ledger posted on www.NJ.com.
A related report in the Courier News goes on to say "the suit claims that Merrill Lynch 'breached its fiduciary and contractual duties' in the management of his assets [involving] whole life-insurance policies that were represented to be a safe investment with a rate of return equal to a municipal bond portfolio." According to the suit, Merrill Lynch's Family Office Group "concocted" a plan in late 2002 for Vangelos to buy $276 million of life insurance at age 72 and with annual premiums of $4 million.
In spring 2005, Vangelos complained to the supervisors of the Merrill Lynch Family Office Group who found the life insurance plan "patently unsuitable". Vangelos then commissioned a separate audit of the insurance policies, which found the policies were not "designed for wealth accumulation," but instead to increase the commissions for Merrill Lynch, the suit states. By this time, Vangelos paid $16 million in premiums, but the policy had a cash value of only $8.5 million, according to the suit.
The suit further contends the policy generated millions in commissions for Merrill Lynch, but the cash surrender value of the policy would be far less than the premiums Vangelos paid and accuses Merrill Lynch of fraud, consumer fraud and fraudulent misrepresentation. Whether Vangelos prevails or not, this latest action is yet another warning sign that clients expect financial advisors to apply the same standards for suitability to life insurance as they do for other financial products.
Of course, the THEInsuranceAdvisor.COM (TIA) product ratings and pricing and performance research can be an invaluable tool in determining and documenting the suitability of a given life insurance product to a given client situation. In fact, TIA's CPE Research Reports even include a Pricing Style Box that clearly indicates whether a given product is designed for wealth accumulation given a defined contribution or for minimum premiums given a defined death benefit, which certainly could have been useful in the Vangelos case.
As such, the Vangelos case illustrates how financial advisors need more tools and research to better determine the suitability of the life insurance products they are recommending to their clients. The Vangelos case also shows how financial advisors could use such tools and research as a competitive advantage to independently demonstrate when a recommended product is less than suitable, and thus be in a position to place a more suitable product.
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