Aid Association for Lutherans sued over alleged "premium free" policies
By Mark Cybulski
July 20, 2000
The Aid Association for Lutherans is being sued in a potential national class action lawsuit that alleges the company used a number of misleading sales practices to induce policyholders to replace their old life insurance policies with new ones, or to buy policies they didn't need.
The lawsuit alleges that the insurer used a number of sales schemes, including "vanishing premiums" and "churning," to convince policyholders to buy its Horizon Universal Life Insurance Policy. Vanishing premiums is when an agent falsely predicts to customers that the cash value in their policy will perform so well that they won't need to pay future premiums. Churning is a practice in which policyholders are persuaded to use the cash value in their old policy to buy a newer one they don't necessarily need.
The suit also claims that some agents pitched policies as traditional investments or savings vehicles, but did not disclose how accessing cash value can lower the death benefits on their policies. The association's "agents were instructed and trained to market life insurance policies as investment plans, retirement/pension plans, education plans, and savings plans, camouflaging or concealing altogether that the product was simply life insurance," the lawsuit states.
"This company held itself out as an arm of the [Lutheran] church in order to have a ready market for its products," says John Yanchunis, an attorney with James, Hoyer, Newcomer & Smiljanich, of Tampa, Fla., one of the firms representing the plaintiffs. The association "harmed and exploited the very people who supported and trusted it over the years," he says.
The lawsuit, which was filed in Wabash Circuit Court in Indiana on July 18, is seeking class action status. Anyone in the United States who owned a whole life or universal life insurance policy from the association between Jan. 1, 1982, and Dec. 31, 1999, or anyone who was a beneficiary of such a policy bought at that time, would be eligible for compensation if the class action is certified by the court.
Stephen Wuerger, a spokesperson for the association, says the insurer has not yet been served with papers and thus has no comment.
The Aid Association for Lutherans is a fraternal benefits organization based in Appleton, Wis. It has about 1.8 million "members" nationwide who own life insurance policies or annuities with the association, or mutual funds from its subsidiaries.
Plaintiff Glenn Hawkins, of North Manchester, Ind., says he bought a $100,000 whole life policy from the association in 1961. In April 1987, he claims that he was contacted by one of the association's agents who told him that he could buy a new policy that would be "premium free" by paying $2,000 up front and surrendering his old policy and applying the $9,991 in cash value he had built up to the new policy. Hawkins agreed to do so and bought a $100,000 Horizon Adjustable Life Insurance Policy.
In September of that year, the agent convinced Hawkins that if he invested more money into the new policy, he would have a policy that was "paid up" meaning no more premiums were due until age 100. Hawkins then agreed to transfer $20,000 into the policy, but claims he unknowingly purchased a new policy with a face amount of $51,125.
At the same time, the agent convinced Hawkins' wife, Nedra, to pay $12,000 into a $50,000 life insurance policy. To do this, she borrowed $4,000 from her IRA with the association, $5,000 from an existing whole life policy, and added $3,000 in cash. The agent allegedly told her she would not have to make another premium payment for "many, many years, most likely, forever."
In 1991, another agent from the association contacted Nedra Hawkins and told her that her policy had been "overfunded" and that she could double her coverage at no additional cost. He also suggested that she add a long term care rider to her policy, which he said would also come at no additional cost. She followed his advice.
In 1996, Nedra Hawkins told the original agent (who sold her husband his supposed "premium free" policy) that she wanted to provide her daughter with retirement income. The agent convinced her to borrow $6,000 from her existing Horizon policy and buy another $50,000 Horizon policy, naming her daughter as the beneficiary. The agent told her she would not have to pay any premiums until 2002.
In August 1998, Nedra Hawkins received a note from the association saying she owed $200 in premium on the $50,000 policy she bought for her daughter's retirement income. The lawsuit also says that Hawkins has since been told that annual premiums of $200 are "insufficient" and that she must pay $1,100 per year or else the coverage will lapse.
She was also told by the insurer that her $100,000 policy will lapse in seven years if she does not start paying the necessary premiums because the cash value built up in the policy that is currently paying the premiums is running out.