#250 | McGinnis vs. Everyone

Two weeks ago, Life Annuity Specialist, a news publication for life insurers, ran an article about a lawsuit filed in Texas (here) by a consumer against his agent, the agent’s brokerage firm and the life insurer. My ears always perk up when I hear about one of these lawsuits because, usually, they make for quite interesting reading. They’re often packed with jaw-dropping details and accusations about agent behavior that ranges from basic misrepresentations to elaborate schemes to commit insurance fraud. Anyone in our industry who reads these lawsuits usually comes to the conclusion that the agents accused of this type of misbehavior are not representative of the norm. They’re as foreign to a normal insurance agent generally trying to make a living and serve their clients as a college student microwaving ramen noodles is to a Michelin-starred chef. They’re both making food – but that’s where the similarities stop.

This lawsuit, however, is different. What makes it so bizarre and terrifying is that it seems so perfectly normal. The lawsuit itself is pretty light on details so it’s possible that there are some salacious parts left out, but taken at face value, this lawsuit appears to accuse an insurance agent of working with a BGA to sell a regular product to a guy who needed it. In fact, the plaintiff argues that “his estate is now under-insured,” which might be the first time in all of history that a client has sued an agent for not selling him enough life insurance. If the agent is getting sued for this transaction, then who’s safe? Let’s dig in.

The plaintiff is Lew McGinnis of Oklahoma. A little bit of googling leads me to think that Mr. McGinnis is likely an “embattled multifamily [real estate] investor” who isn’t exactly afraid of litigation, according to information I found on this page. The defendants are his agent, James Mueller, the agent’s brokerage firm, ASA Group, and Nationwide. There are three overarching claims in the lawsuit and each one deals with a particular defendant.

The claim against Mr. Mueller is that he “had no specialized training in estate planning” despite the fact that he “held himself out as possessing specialized estate planning knowledge…above that generally held by a typical life insurance agent.” The lawsuit also claims that “Mueller performed no suitability analysis” and that, “at a minimum, one would have expected Mueller to consult with McGinnis’s legal counsel and tax consultant prior to making any recommendations, but he did not.” In other words, Mueller did what I’ve seen a lot of life insurance agents do – he positioned himself as an estate planning expert despite not having a professional designation in the field, performed some sort of analysis that identified an estate tax need and then sold a life insurance policy to fill it without coordinating with the client’s other advisors. And given the lawsuit’s silence on the estate planning strategies implemented based on Mueller’s recommendations, there doesn’t appear to be a problem with the actual estate planning recommendations.

Instead, the meat of the lawsuit relates to the insurance placement itself, both in the product selection and the way it was distributed. The lawsuit accuses Mueller going “out of his way to place insurance through an out of state insurance broker known as the ASA Group” in order to “personally benefit himself” and “[earn] an above average commission.” The correct course of action, according to the lawsuit, would have been for Mueller to place the business directly with the life insurers. Anyone who has even a passing knowledge of how life insurance is distributed knows that’s not the optimal way to process the business and in some cases isn’t even possible because the insurer exclusively distributes their products through BGAs. Mueller wasn’t working with a BGA to earn an “above average compensation,” which is highly unlikely and unproven in the lawsuit. Instead, he appears to have simply been following the standard industry process for placing a life insurance policy by using a BGA and, in my opinion, a good and reputable one at that.

The final claim in the lawsuit is that the UL policy was inappropriate for estate planning. The lawsuit argues that Universal Life is an “experimental” and “non-permanent” product whereas Whole Life is guaranteed and, therefore, a better fit for estate planning where permanency is key. The lawsuit goes further by saying that “McGinnis was promised permanent coverage and was led to believe that he was purchasing permanent life insurance.” Instead, it appears that the “UL policies which were sold by Mueller – brokered by ASA, and underwritten by Nationwide, did not perform as illustrated and guaranteed.” The lawsuit is scant on details about the product itself and doesn’t even state the name of the product, but we can surmise that it is some breed of vanilla Universal Life because the lawsuit doesn’t explicitly address any sort of index crediting methodology.

There’s a lot going on in this lawsuit that could warrant some focus. Should insurance agents tout themselves as estate planning experts without any credentials to back it up? Probably not. Should insurance agents disclose the fact that they’re working with a BGA and why they’ve chosen to go with a particular carrier, including as it relates to their compensation? Sure. But both of those points are just window dressing. At its core, this lawsuit is about a Universal Life policy that wasn’t well explained or understood when it was sold. It’s about a Universal Life policy that was sold as “permanent” insurance on-par with Whole Life and the client now understands isn’t. Without a problem with the product and the way it was explained, there wouldn’t be a lawsuit.

In all likelihood, Mueller explained the Nationwide Universal Life policy to McGinnis the way that most agents do. He referred to it as “permanent” life insurance policy with a defined premium. As the lawsuit astutely points out, that’s not actually what it is. Universal Life is a flexible premium product. It’s an account, for lack of a better term, that has charges deducted monthly and interest credited monthly on the balance in the account. The premium is simply the amount that the client has chosen to pay based on certain assumptions about future performance in order to keep the policy in-force for the desired period of time. In my experience, very few clients understand that’s what Universal Life is. Instead, they approach it like it’s Whole Life. In fact, the lawsuit has a whole section entitled “When Whole Life Is Not Really Whole Life” to make that point. To state the obvious, Universal Life isn’t Whole Life and shouldn’t be discussed as if it is. This lawsuit makes you wonder how many clients think they own Whole Life when, in fact, they own Universal Life. It’s probably more than a few.

There are certain things that make me think that the Universal Life policy in question is actually a Guaranteed UL. The lawsuit claims that “McGinnis is also damaged by the lost opportunity have accumulated a build-up in cash-value,” which would only be true of a Guaranteed UL policy. The lawsuit doesn’t say when the policy was sold, but Nationwide has been almost exclusively selling Guaranteed UL for estate planning protection for the past decade except for its Indexed UL product line.  If, in fact, the policy is a Guaranteed UL then things become a bit trickier. Agents are particularly prone to describe Guaranteed UL as a fixed premium product akin to Whole Life, but that’s not accurate either.

Many years ago, I was involved in a transaction where a Guaranteed SUL product was sold to a client with three (yes, 3) degrees from Harvard. Upon receiving his contract in the mail, he did what few clients and even fewer agents do – he read it. He was looking for an assurance that paying his $100,000 per year would guarantee his $20 million of death benefit. Instead, he found inscrutable language about an account value and a secondary account value with a bunch of rates and complex formulas, but nothing in his contract that clearly stated that if he paid $100,000 then the $20 million of death benefit is guaranteed. He was furious. It took a phone conversation lasting more than two hours to walk through the contract to show him how it worked. Eight years later and just a few weeks ago, he called the agent back to ask for a refresher on what exactly it was that he purchased. Universal Life and Guaranteed UL are hard to understand – even for a guy with three degrees from Harvard.

But that doesn’t make them “inappropriate” for estate planning purposes, as the lawsuit claims. In fact, it’s just the opposite. The flexibility of Universal Life policies is a benefit for estate planning because every premium payment has to squeeze through the keyhole of gift tax exemptions if the policy is owned by an irrevocable trust. Clients are often willing to give up the substantial benefits of Whole Life – namely, guaranteed cash value and the potential to have an increasing death benefit from paid-up additions – in order to have lower premiums and reduced gift tax friction. Universal Life, in many ways, is a purpose-built tool for estate planning as long as the client understands the tradeoffs. Unfortunately, far too often they don’t. And that leads to cases like this one.

The case of McGinnis vs. Nationwide, Mueller and ASA could be the case of McGinnis vs. Anyone. It’s a classic situation of an outsider taking things that we perceive to be perfectly normal, like placing business through a BGA, to be a nefarious scheme to take advantage of the client. Our industry has an unsavory reputation for being more interested in lining its own pockets than protecting its clients. Every good agent fights against that reputation and we have absolutely no reason to believe, based on the facts in this lawsuit, that Mueller was not a good agent. He prospected, he identified a problem and he presented a solution. From there, he worked with a reputable BGA to place business with a quality life insurer. The only thing that appears to have gone wrong is that the client didn’t understand what he was buying.

If there’s one thing to take away from the McGinnis lawsuit, it’s this – make sure your clients understand the products they are buying. Universal Life policies are not Whole Life policies. There is no such thing as a “premium” for a Universal Life policy, only “planned premiums” or “illustrated premiums,” even in most Guaranteed UL products. All Universal Life policies have monthly charges and credited interest, even most Guaranteed UL products. The agent should show these charges and credits separately from the illustrated values so that the client understands how the product actually works and explain that they will change over time due to market forces, not nefarious life insurer actions. A well-informed client should be able to articulate back to the agent the fact that a Universal Life policy is a flexible premium product and describe the basic math that goes on every month (premium in, charges out, credits in).

In my experience, clients like that have two reactions to life insurance. First, they get it in a deep and intuitive way. They really grasp what they are buying. And second, as a consequence, they are astounded at the power and flexibility of the chassis. That’s the kind of client you want. And that’s the kind of client that, it appears, Mr. McGinnis was not.