What is Whole Life Insurance?
As its name suggests, whole life insurance is a permanent policy that stays in effect for the policyholder’s lifetime or as long as premium payments are made. Under a whole life policy, when the insured pays premiums, a portion goes towards the insurance cost while the rest builds up as a cash value.
This cash value grows on a tax-deferred basis and can even be borrowed against or cashed in during the policyholder’s lifetime. Due to its lifelong coverage and cash value component, it often appeals to those interested in an insurance product that will provide cash value to one day pay the premiums due out of this cash value component. Unfortunately, many brokers sell these products as investment vehicles and tout the cash value component as a way to build retirement savings.
Two main types of whole life insurance exist: variable and fixed.
- Fixed whole life insurance promises a guaranteed death benefit, premium, and cash value growth rate. This type ensures predictable growth and is ideal for individuals who seek stability.
- Variable whole life insurance allows policyholders to invest cash into various sub-accounts, such as bonds or equity funds. While this variation could yield higher returns, it also introduces more risk as the cash value is subjected to market performance.
These products, sometimes called LIRPs (Life Insurance Retirement Plans), are sold to fund an individual’s retirement using the policy’s tax-free loans. They involve high premiums, commissions, and fees and are often sold to the public without adequately representing the costs and tax implications.
The Dangers of Transitioning Investments into Variable or Fixed Whole Life Policies
Unfortunately, some unscrupulous stockbrokers exploit their clients’ trust and lack of knowledge, convincing them to transition their existing investments into variable or fixed whole life insurance policies. They often paint a rosy picture of appealing benefits such as tax-free growth, guaranteed returns, and potential for high dividends while downplaying the associated risks and costs.
Stockbrokers might also assert that these policies are safer and more lucrative than traditional investments. This deceptive practice results in clients liquidating their stocks, bonds, or mutual funds, thereby losing potential returns.
Even worse, once the switch is made, policyholders may be trapped in contracts with high surrender charges and subpar returns. This is one of the crucial ways investors can fall prey to whole life insurance scams.
Stockbrokers are held to a standard known as a fiduciary duty, which requires that they act in the best interest of their clients. The duty includes providing accurate information, offering suitable investment advice based on the client’s financial situation and goals, and avoiding conflicts of interest.
When a stockbroker persuades clients to transition investments into whole life insurance policies, misrepresenting them that it is the most suitable option for their financial goals, they may be breaching their fiduciary duty. This harmful practice results in clients missing potential returns from more suitable investments and can lead to significant financial losses due to the high costs and surrender charges associated with these policies.
What Victims of Whole Life Insurance Scams Can Do
Securities fraud attorneys like those at Oakes & Fosher actively pursue arbitration through the Financial Industry Regulatory Authority (FINRA) against stockbrokers and brokerages who violate their fiduciary duty to clients. This arbitration is a legal recourse for investors misled into whole life insurance scams, allowing them to seek compensation for their losses.
By representing clients in their arbitration cases, our attorneys strive to hold unethical stockbrokers accountable for their actions and secure financial reparations for injured parties. It’s important to note that while investors can represent themselves, the FINRA process can be complex and technical. Our skilled FINRA arbitration lawyers can guide you through the process, ensuring you adequately present your case and fight for the compensation you deserve.