The variable life insurance policies in question are cash-value policies that include a death benefit as well as a savings component. Under a variable contract, a portion of the premium accumulates in quasi-savings accounts and herein lies the problem the customer complaints allege, according to a Dow Jones report.
Clients of Northwestern Mutual, one of the largest purveyors of life insurance in the nation, say the variable life insurance contracts were pitched as a type of retirement plan to set aside funds, similar to a mutual fund, and have insurance, all while being a tax-free, tax-sheltered investment. This language, in turn, caught the attention of the National Association of Securities Dealers (NASD) which began querying customers of the Milwaukee-based firm in 2001, asking about the pitch used by the firm when selling the product.
The rub lies in how variable life insurance policies treat withdrawals made by policy owners during retirement. Many customers said they understood that withdrawals made from their policy would be treated similarly to selling shares in a mutual fund, when they are treated as loans that incurred interest. Thus, many policyholders would be subject to an outlay of capital they were otherwise unaware of.
Executives of the life insurer confirmed NASD’s probe, saying the regulatory body initially asked for a sample of 2,500 policyholders. Since then, the regulatory body has told the company it is focusing on 20 cases involving two agents, one in Kansas City, Missouri, the other in Indianapolis, Indiana. The company said it has found no problems with the agents’ sales.
Of the two agents involved in the NASD probe, one remains with the company while the other left in 2002 because “he was unwilling or unable to comply with internal compliance and supervisory procedures,” and not “because of litigation or regulatory concerns,” the company told Dow Jones.