Bill Ruger bought a $5 million universal life policy form his long term insurance agent, Dan Wesson. Dan supplied an illustration showing that if Bill paid $15,000 a year for 10 years, the cash build up in the policy would be enough to carry the cost of the life insurance forever.
At year 7 Bill compared his policy annual report to the illustration and noted that the cash build up was much less than that shown on the original illustration. Not only was the value less, but when he asked the insurance company about when the policy would be paid up, they told him that even if he paid $15,000 each year, the policy would still lapse at age 83.
Bill sued his agent. When I reviewed his file, I found that it had been agreed from the very beginning that Bill would only invest in the guaranteed GIC type investment option in the policy. This option guaranteed at least 4% each year. At the time of purchase, the 10 year guaranteed rate was 5%, but had been on a downward trend.
The illustration was based on 9%, which might have been a fair rate to assume if the equity fund investment option was chosen. But the intention was always to use only guaranteed interest.
The agent should have illustrated at 5% and 4%. It was deceitful (or negligent) to illustrate a 5% investment at 9%. The agent knew from the beginning that the only option contemplated was guaranteed interest, and the maximum he could illustrate was the current rate of 5%.
The case settled. The agent’s E & O policy made a substantial contribution to the policy, so that it would be paid up, as originally illustrated.