Parry Deering Futscher & Sparks regularly represents policy owners in litigation against major life insurance companies arising out of unfair and deceptive sales practices. These unfair and deceptive practices include the sale of life insurance on a "vanishing premium" basis, the replacement (sometimes called "churning") of existing life insurance with a new life insurance policy and the sale of life insurance as a savings, investment or retirement vehicle.

A policy owner may be the victim of the "Vanishing Premium" sales scheme if he or she was sold a life insurance policy on the promise that only one or a limited number of premiums would be required for the policy to become "paid-up." The policy owner is promised that no further out-of-pocket premium payments will be required after the single or limited number of premium payments are made.

The "vanishing premium" sales scheme was most prevalent in the mid to late-80's when interest rates were extraordinarily high. The insurance company was able to present the prospective purchaser with a uniform policy illustration which showed premium payments reducing to "0" (that is, "vanishing") after a certain number of years. We have also seen life insurance companies design life insurance policies for the express purpose of selling them through the "vanishing premium" sales scheme. These companies essentially shift policy values from one portion of the policy to help reduce or "vanish" the premium faster.

What the companies did not tell the policy owner was that there was a 100% chance that the detailed, uniform policy illustration would be inaccurate after 5 years. The life insurance companies did not tell policy owners that they used overly optimistic assumptions about interest rates, expenses and mortality experience when generating the policy illustrations. When interest rates fell, or expenses increased, or mortality worsened, the premium would not "vanish" as promised and policy owners would be faced with paying premiums well beyond the original "vanish" date. The policy owner may not have the financial resources to continue paying the premium causing the policy to lapse.

Replacing one life insurance policy with another is almost never in the best interest of the policy owner. Replacement benefits the life insurance company and the agent by generating new policy fees, charges and commissions. A replacement occurs where a policy owner is encouraged to either surrender or borrow from an existing life insurance policy to finance the purchase of another policy from the same or a different company. Many state have statutes or regulations prohibiting such conduct.

Replacement is detrimental to the policy owner for a number of reasons: (1) the policy owner is older when the new policy is issued resulting in higher cost of insurance charges; (2) the policy owner usually incurs surrender charges on the money received from the existing policy reducing the amount placed into the new policy; (3) the policy owner incurs interest charges when borrowing from the existing policy to purchase the new policy; and, (4) the policy owner will loose valuable contractual rights like incontestability provisions, suicide clauses and fixed loan interest rates when surrendering the existing policy.

We have seen a number of companies encourage and orchestrate massive "updating" campaigns by their sales force. These programs are usually nothing more than organized replacement or churning efforts.