Policyholders Claim Massive Rate Increase Unlawful
Transamerica Life Insurance Company faces a class action lawsuit over a massive rate increase to its flexible premium life policies. Plaintiffs allege that the 61% increase to their monthly deduction rates (“MDR“) is unlawful and excessive.
These policies were issued decades ago. Many policyholders are now elderly and are faced with either paying the exorbitant and unjustified new charges, or losing the benefits for which they have dutifully paid premiums to Transamerica for decades.
Transamerica’s Reasons For Increase Are Fraudulent And Unsupported
According to the lawsuit, policyholders received a letter in late 2021 alerting them to the MDR rate increase. In the letter, Transamerica purported to explain “What’s Changing and Why.” Transamerica claimed that it was increasing MDRs “based on our current expectations about our future costs for providing this coverage” and that the increases are “in addition to the customary increases that are associated with age.” The letter failed to provide quantitative justification for the increase per the terms of the policy.
Independent analysis and enumeration of the future cost factors cited by Transamerica does not support their position. Not only did Transamerica ignore positive changes in enumerated factors such as recent corporate tax reform that benefited Transamerica, it also ignored recent improvements in mortality, expenses, interest, and all other cost factors that feed in the MDR calculation. Thus the reasons given by Transamerica could not possibly warrant an increase, much less an increase of 61%.
The lawsuit claims that the Policies were designed to allow Transamerica to realize high mortality profits in the early years, immediately after the policies were priced and issued. But as the policies progressed to the later durations, Transamerica faced constrained future profits and looming future losses resulting from its early policy design choices. When the date arrived to confront its pricing decisions, Transamerica reacted by saddling policyholders with the massive MDR increase in an attempt to recoup past losses and make any outstanding Policies more profitable in future years.
MDR Hike Harms Policyholders
According to the lawsuit, Transamerica knows, and fully expects, that many policyholders cannot afford the massive MDR increase and would surrender or lapse their Policies. To the extent that policyholders surrender or lapse their Policies following the increase, Transamerica will wipe the unprofitable Policies from its books.
Transamerica has actively sought to encourage and provoke policyholders to terminate their policies or reduce the face amount of coverage enough to allow Transamerica to collect the increased monthly deduction charges. In its form letter announcing the MDR increase, Transamerica suggest that policyholders “may choose to surrender your policy for the cash value… You can take this in cash or you may be able to exchange it for another life insurance policy that accumulates cash value.” Transamerica also suggested an alternative “Reduced Face Amount Option,” which would drastically reduce the insurance coverage while still allowing Transamerica to pocket the increased Monthly Deductions as long as the Policy remained in force.
Insurance is intended to cover policyholders for unforeseen future events, with the insurance company taking the risk of the unknown (whereas events in the past are known). The terms of these Policies are meant to prevent the insurer from engaging in a bait-and-switch tactic, where it projects future premiums in the future using an original scale of Monthly Deduction Rates, collects premiums, and then, with customers locked in, turns around many years later and reveals more expensive Monthly Deduction Rates due to alleged changes in expectations that happened long ago.