Thursday, October 18, 2018

No. 290: Transamerica Moves to Settle a Class Action Lawsuit Relating to Cost-of-Insurance Increases

In February 2016 California resident Gordon Feller and several others who had purchased universal life insurance policies from Transamerica Life Insurance Company filed a class action lawsuit against the company in a federal court in California. The case relates to large cost-of-insurance (COI) increases Transamerica imposed on owners of universal life policies. The case was assigned to Senior U.S. District Judge Christina A. Snyder. (See Feller v. Transamerica, U.S. District Court, Central District of California, Case No. 2:16-cv-1378.)

I wrote about the Feller case in No. 239 (October 23, 2017). Recently the plaintiffs filed a motion for preliminary approval of a proposed settlement of the case. Here I discuss the proposed settlement.

The Parties' Views
In No. 239, to provide a brief description of the plaintiffs' views, I showed four paragraphs from their second amended complaint. To provide a brief description of Transamerica's views, I showed nine paragraphs from the company's motion to transfer the case to the Northern District of Iowa, where the company is based. I also showed four paragraphs from Judge Snyder's denial of the motion.

Class Certification
In May 2016 the plaintiffs filed a motion for class certification. During discovery, Transamerica filed many documents under seal pursuant to protective orders. In December 2017 Judge Snyder granted the plaintiffs' motion for class certification. In March 2018 the Ninth Circuit granted Transamerica permission to appeal Judge Snyder's grant of the plaintiffs' motion for class certification. (See Feller v. Transamerica, U.S. Court of Appeals, Ninth Circuit, Case No. 18-55408.) In April 2018 the parties entered into mediation.

The Proposed Settlement
On October 4, 2018, the plaintiffs filed a motion for preliminary approval of a proposed settlement of the case, and a memorandum in support of the motion. The proposed settlement defines the class as "All persons or entities who own or owned a Policy encompassed by the MDR Increases during the Class Period," with certain exclusions. ("MDR" stands for "Monthly Deduction Rate.") The proposed settlement grew out of mediation overseen by David Geronemus of JAMS. (Originally JAMS stood for Judicial Arbitration and Mediation Services, Inc., but the firm now is JAMS Mediation, Arbitration and ADR Services.) Here are the key benefits to class members, as shown in the memorandum:
  • The creation of a $195 million Settlement Common Fund benefiting both In-Force Policies and Terminated Policies owned by the Class Members, plus payment by Transamerica of the first $10 million in attorneys' fees approved and awarded by the Court.
  • Transamerica's agreement that it will not impose any additional MDR increase(s) on any Class Policy within five (5) years of the Execution Date, unless ordered to do so by a state regulatory body (a development that is considered highly unlikely).
  •  Transamerica's agreement that any future MDR increase(s) on the Class Policies after the five-year freeze will be based only on the collective effect of the cost factors assumed when the Policies were originally priced and will not increase the expected future profitability of Policies within the same plan to a higher level than projected based on original policy pricing assumptions, which is intended to ensure that Transamerica does not recover past losses.
  • Transamerica's agreement not to seek to void, rescind, cancel, have declared void, or otherwise deny coverage on death claims submitted by Settlement Class Members based on any alleged lack of insurable interest or misrepresentations made in connection with the original application process.
The plaintiffs also filed the proposed notice to be sent to class members. It includes a few other aspects of the proposed settlement.
  • Subject to applicable regulations, Transamerica has agreed to provide Settlement Class Members, upon request and at no cost to the Settlement Class Member, an illustration depicting the impact of the Settlement Relief on the anticipated future performance of their respective in-force Class Policies. Settlement Class Members may make such a request by contacting the Settlement Administrator.
  • Settlement Class Members with in-force Settlement Class Policies will be paid their share of the Settlement Common Fund by deposit made by Transamerica directly into the accumulation value of each Policy.
  • Settlement Class Members with a Terminated Policy will be paid their share of the Settlement Common Fund by check.
  • No Settlement Class Member will receive a payment less than $100.
  • Plaintiffs' Counsel will seek an award for Plaintiffs' attorneys' fees of up to 25% of the value of the Settlement Common Fund (after any reduction for the amount of Settlement benefits that would have been paid to policyholders who exclude their Policies from the Settlement). Plaintiffs' counsel will also seek reimbursement of the litigation expenses they have advanced on behalf of the Settlement Class over the course of the litigation not to exceed $__________, to be paid out of the Settlement Common Fund. However as an additional important Settlement benefit, Transamerica has agreed to pay Plaintiffs' Counsel the first $10 million of the attorneys' fees and expenses awarded by the Court, separate and apart from the Settlement Common Fund.
General Observations
Feller and other COI cases with which I am familiar have led me to believe that universal life insurance policies are fundamentally defective unless they are managed with extreme care. The annual reports companies send to policyholders are so complex that the average policyholder—or even a sophisticated policyholder—will find it difficult to perform the management function adequately. A skilled and highly professional agent may be able to perform that function, but many policyholders do not have access to the services of such agents. I plan to write further on this in the near future. Meanwhile, I plan to continue following developments in the Feller case.

Available Material
I am offering a complimentary 58-page PDF consisting of the memorandum in support of the motion for preliminary approval of the proposed settlement (39 pages) and the proposed notice to be sent to class members (19 pages). Email jmbelth@gmail.com and ask for the October 2018 package relating to Feller v. Transamerica.

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Monday, October 15, 2018

No. 289: The Age 100 Problem—Our Personal Dilemma

In 2000 I received a letter out of the blue from an individual who owned two traditional participating whole life policies in different companies with a combined face amount of more than $5 million. He was in his 80s and in good health. He wanted his beneficiaries to receive the face amount after his death, but feared he would incur a large income tax obligation if he survived to the policies' terminal age of 100 and received the face amount himself. He wrote the companies asking how to avoid the potential income tax problem. He did not receive straight answers.

I wrote to the chief executive officers of 20 life insurance companies inquiring about the problem. I received responses from only three companies, and those three did not provide straight answers. I became convinced that life insurance companies did not want to discuss the subject. I wrote articles in the January 2001 and May 2001 issues of The Insurance Forum about what I called "the age 100 problem." Later, on my blog, I wrote five posts about the problem: No. 141 (February 1, 2016), No. 226 (July 20, 2017), No. 241 (November 17, 2017), No. 269 (June 6, 2018), and No. 277 (July 17, 2018).

Recent Developments
In June 2018 I conducted another survey by writing to the chief executive officers of 22 life insurance companies. I received responses from nine companies, but none responded to the heart of the survey. It involved a request from a hypothetical 93-year-old policyholder named Jones, who had purchased a $100,000 traditional participating whole life policy in 1975 at age 50. He had paid all annual premiums and had taken all dividends in cash. He had written to the company recently asking for assistance with a potential income tax problem should he survive to the policy's terminal age of 100. None of the responding companies provided information about the Jones policy. The survey and its results are described in No. 277 mentioned above.

Our Personal Policies
My wife and I have nine old traditional participating whole life policies issued many years ago by four life insurance companies. We have paid all premiums annually, have taken all dividends in cash, and, although we borrowed on the policies from time to time many years ago, we now have no policy loans outstanding. We are in our 80s. The cash values are getting close to the face amounts. Therefore, because the protection component of each policy (the face amount minus the cash value) is small, we now have little protection. We no longer need the protection, but we need to plan for the disposition of the policies. We do not identify the companies here because that is our private information.

Given the lack of adequate responses to the 2000 and 2018 surveys, I decided as a last resort to write to the four companies about our own policies. We knew they would have to respond, and we could complain to state insurance regulators if they did not. Our letters went out on July 9, 2018. Here I report on the progress thus far.

Company A
Company A has a small paid-up policy on my wife. We inquired about the current cash value and the amount of taxable gain that will be reported on a 1099 if she surrenders the policy in 2019. We also asked for a sample of the letter the company will send her as she nears the terminal age of 100 if she has not surrendered the policy. We think the letter will offer an option to keep the policy beyond the terminal age. The company provided the cash value figure and the amount of taxable gain, but declined to provide the sample letter.

On August 20 we filed a regulatory complaint. To date we have not received a reply from the insurance department or the company. At present we plan to surrender the policy in 2019 and pay the tax on the gain.

Company B
Company B has two small policies on my life. We inquired about the current cash values and the amounts of taxable gains if the policies are surrendered in 2019. We also asked for the sample letter.

Initially the company provided the current cash values, but did not indicate the taxable gains. Also, the company did not provide the sample letter. In response to our follow-up, the company still did not provide the sample letter. Also, instead of indicating the taxable gains on surrender in 2019, the company said this about each policy and the Internal Revenue Service (IRS):
The values in this policy do not meet [the company's] guidelines for tax reporting at this time, if the policy is surrendered for its cash value. The IRS does not require life insurance companies to calculate taxable amounts on policies that meet certain guidelines. This contract falls within those guidelines and [the company] will not send a tax notification to you or the IRS. Details of this transaction will be shown on your annual report, which you should receive after your next policy anniversary. If any changes are made to the policy between the calculation date and the transaction processing date, the values could change. If you should have additional questions regarding tax regulations, please contact your Tax Advisor.
We asked again for the sample letter, and requested the IRS guidelines. In response, the company again ignored our request for a sample letter, but provided these guidelines:
  1. Policy must be a nonqualified plan.
  2. Issue date must be before August 13, 1982.
  3. Gross cash value must be less than or equal to $5,000. Gross cash value equals the policy cash value including loans. Dividends are not factored into the equation.
  4. The rule only applies to surrenders and maturities.
The company cited "Treas.Reg.Sec.35.3405-1." I found that section, but do not fully understand it. The company again suggested contacting our tax advisor, and made this surprising comment:
It is the responsibility of the policy owner to determine "what," "if," and "how" to report the transaction to the IRS as part of their returns. We can only advise that the contract falls under the guidelines, which do not require us to review or report the transaction.
At present we plan to surrender the policies in 2019. We will follow our tax advisor's recommendation on how to report the transactions in our 2019 tax return.

Company C
Company C has three fairly large policies on my life and one small policy on my wife's life. We asked for a sample of the letter that would be sent to us if we should maintain the policies and approach the terminal age of 100. We also asked for estimates of the surrender values and estimates of the taxable gains that would be shown on the 1099s if we surrender the policies in 2019. On July 19 the company provided the surrender values but ignored our request for the sample letter and the estimates of the taxable gains.

On August 20 we asked again for the sample letter and the estimates of the taxable gains. On August 31 the company provided the face amounts and the surrender values, but again ignored our request for the sample letter and the estimates of the taxable gains.

On September 4 we filed a regulatory complaint. On September 10 the company provided the estimates of the taxable gains. Instead of providing the sample letter, the company provided copies of all four policies in their entirety and made these comments:
Please note that the policies in question do not have a stated maturity date; therefore, these contracts do not mature or terminate at age 100. These policies are not affected by the insured reaching age 100, and we don't have a sample letter to share with you.
Although the policies may not have a stated maturity date, they are based on mortality tables with a terminal age of 100. At this moment we do not know what will happen if we reach the terminal age; that is, we do not know whether the face amount will grow, whether premiums will continue to be charged, whether cash values will continue to grow, or whether dividends will continue to be paid. We do know that at present the amounts of life insurance protection in the policies are small, and the estimated taxable gains if we surrender the policies are substantial. At present we plan to surrender the small policy in 2019, but we do not know what to do with the three large policies.

Company D
Company D has one fairly large policy on my life and one fairly large policy on my wife's life. We asked for a sample of the letter that would be sent to us if we should maintain the policies and approach the terminal age of 100. We also asked for estimates of the surrender values and estimates of the taxable gains that would be shown on the 1099s if we surrender the policies in 2019. We received no reply.

On August 27 we filed a regulatory complaint. We received replies dated September 20 from the company and from the department. The company told the department and us that responses to our July 9 letter had been mailed to us on July 17, that we must not have received them, and that the company was now sending a more detailed response. The company's September 20 letter is signed by an officer who is a fellow of the Society of Actuaries. Here is the bulk of the letter:
You asked what will happen when the Insured reaches age 100. Your contracts do not specifically identify a maturity provision when the Insured reaches age 100. You can choose to leave the policies in force until death when the proceeds would be paid to your beneficiaries. Please note that under these contracts you would not receive any dividends beyond age 100 nor would any premiums be due. Alternatively, you could choose to access the cash surrender value via the options stated in your policy. It is not possible to accurately predict what the tax rules will be on your policy anniversary in 2034. [We] do not offer tax advice. You may want to consult your personal tax advisor regarding your particular situation.
The actuary's letter goes on to provide the projected surrender value in 2019 for each policy, along with the estimated taxable gain for each policy. We were astounded that, for each policy, the projected surrender value in 2019 and the estimated taxable gain in 2019 are identical.

On October 8 we asked the actuary how the company determined that the surrender values and the estimated taxable gains are identical. We also asked for confirmation of our understanding that, if we survive to the terminal age and leave the funds with the company, we would receive no interest on those funds. We also asked for the July 17 letters we did not receive. At present we do not know what to do with the two policies.

General Observations
When we purchased life insurance many years ago, it did not occur to us that we would encounter income tax problems if we were fortunate enough to survive into our 80s. Now that we are there, we have decided to surrender the four small policies and pay the taxes. We have not yet figured out what to do with the other five policies. Many of our readers are life insurance experts, and we would welcome any thoughts they might have on how we should dispose of the five policies.

Available Material
I offered complimentary packages in each of the five posts identified in the second paragraph of this post. The packages remain available. If you want to receive any of them, email jmbelth@gmail.com and ask for the ones you want using the language we used at the end of each post to describe the packages.
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Tuesday, October 2, 2018

No. 288: Edwin Sutherland: A Censorship Case

In No. 283 (August 23, 2018), in a review of Jesse Eisinger's 2017 book entitled The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives, I said he attributes the expression "white-collar crime" to the late Edwin Sutherland, a sociology professor at Indiana University (IU). Eisinger also says Sutherland's classic 1949 book entitled White Collar Crime was censored for many years. I was startled by the reference to censorship because, during my 56-year association with IU, I have considered the school a bastion of academic freedom. Here I discuss the Sutherland censorship case.

The 1939 Talk and the 1940 Paper
Sutherland was a prominent sociologist. Among the schools at which he taught were University of Illinois, University of Minnesota, and University of Chicago. Later, at IU, he chaired the sociology department. In 1939 he served as president of the American Sociological Society. On December 27, 1939, he delivered his Presidential Address at a joint meeting with the American Economic Association. The paper was published in the February 1940 issue of the American Sociological Review under the title "White-Collar Criminality."

The First Version of the Book
In 1949 Dryden Press published the first version of Sutherland's book. The original manuscript included citations to court rulings and regulatory commission findings, thereby identifying many prominent corporations as "criminals." Dryden, fearing lawsuits for damages, demanded deletion of names. The IU administration also pressured Sutherland, because it feared alienating major contributors. Sutherland agonized over the issue, and eventually agreed to make the deletions. He explained his decision in two paragraphs of a preface in the first version of the book:
The corporations, whose records before the courts and commissions are presented in this book, are designated by numbers and letters rather than by names. The identity of the corporations is thus concealed for two reasons. First, the identity of criminals is frequently concealed in scientific writings about living offenders. Second, the objective of the book, which is the theory of criminal behavior, can be better attained without directing attention in an invidious manner to the behavior of particular corporations.
Although these reasons for concealing the identity of the corporations which are discussed are convincing, certain losses result. First, it is not possible to present citations to decisions of courts and commissions, since these citations would reveal the identity of the corporations. Even if such citations were to be presented, they could be presented only in illustrative cases. The list of citations for all decisions used would occupy approximately one-fourth of the number of pages in this book. Anyone who is interested in the general principles stated in this book or in the statistical records of the large corporations can make his own statistical analysis from the sources which are described in Chapters II and XII. Second, although illustrative incidents have been presented without names of corporations and with some alterations in unimportant details, these do not give the impression of reality that would be given by documented descriptions of the decisions against well-known corporations. Finally, a person can get a vivid realization that the behavior of these corporations is criminal behavior only by reading many reports of decisions against them. Something is lost, in this sense, since many detailed and documented cases could not be presented without revealing the identity of the corporations. In spite of these losses which result from concealing the identity of the corporations, no essential part of the logic of the book is affected by the policy which has been adopted. [Blogger's note: In the first version of the book, Chapter II is entitled "The Statistical Record," and Chapter XII is entitled "Records of Fifteen Power and Light Corporations."]
Sutherland died the following year, on October 11, 1950, at age 67. While walking to his office, he suffered a stroke, fell, hit his head on a concrete walkway, and died on the way to the hospital.

The Second Version of the Book
In 1961 Holt Rinehart and Winston published the second version of Sutherland's book. It was identical to the first version, including Sutherland's preface. However, it also included a ten-page foreword by Donald R. Cressey. The foreword contained this footnote:
The original White Collar Crime manuscript contained court and commission citations and, thus, identified the various corporations involved. The original publisher's attorneys advised Sutherland that a corporation might sue the publisher and author on the ground that calling its behavior "criminal" is libelous. Sutherland withdrew the manuscript and prepared the present one. Had the original manuscript (which Mrs. Myrtle Sutherland still holds) been published, and had a libel suit been initiated, then Sutherland's contention that the listed offenses are in fact crimes might have been tested in a court of law—a corporation might have argued that the statement is libelous because its behavior is not crime, with Sutherland giving the arguments presented in this volume. I was one of Sutherland's research assistants at the time, and I urged that the manuscript be published for this reason, if for no other. However, my idealistic desire to see a scientific principle tested in a court of law was not tempered by any practical consideration such as having money riding on the legal validity of the scientific principle. This was not the case with either the publisher or Professor Sutherland.
On October 11, 1962, Mrs. Sutherland donated the original uncensored manuscript to the Lilly Library on the IU main campus in Bloomington. I looked at the manuscript there, and it is indeed the original 396-page double-spaced typewritten manuscript showing the names of the corporations. The manuscript includes no introduction, preface, foreword, or index. The title page, Mrs. Sutherland's letter, the table of contents, the list of tables, and Table 3 mentioned below are in the complimentary package offered at the end of this post.

The Third Version of the Book
In 1983 Yale University Press published the third version of Sutherland's book. It is not censored, omits Sutherland's unnecessary preface, includes a 25-page explanatory introduction by Gilbert Geis and Colin Goff, and remains in print today as a quality paperback.

The third version restores an entire chapter entitled "Three Case Histories," which was cut from the two earlier versions. That chapter discusses American Smelting and Refining Company, United States Rubber Company, and The Pittsburgh Coal Company. The chapter also identifies several other corporations related to those three.

The third version also restores the names of the many corporations whose names were previously deleted from various tables. Table 3, for example, is entitled "Decisions by Courts and Commissions against 70 Large Corporations by Types of Laws Violated." The column headings are "Corporation," "Restraint of trade," "Misrepresentation in advertising," "Infringement," "Unfair labor practices," "Rebates," "Other," and "Total." The corporations are listed alphabetically. Those with 25 or more decisions are American Tobacco, Armour & Company, Ford, General Electric, General Motors, Loew's, Montgomery Ward, Paramount, Sears Roebuck, Swift & Company, U.S. Steel, and Warner Brothers. In the first two versions of the book, the corporations listed in Table 3 were identified by numbers 1 to 70, and listed in declining order of "Total" decisions.

My Personal Kinsey Story
When I arrived at IU in 1962, I began work on a questionnaire to be sent to life insurance companies in connection with a research project. Professor J. Edward Hedges, who chaired the insurance area at the time, walked into my office one day and said he was headed to a meeting in the IU president's office. He said IU had received a complaint about me from a prominent alumnus in the insurance business. In response to my expression of concern, Hedges said: "Joe, you don't understand. IU is where Alfred Kinsey did his research." I was aware of the furor over Professor Kinsey's controversial research in the late 1940s and early 1950s on human sexual behavior and IU's staunch protection of him. After the meeting, the president's office asked for a copy of the questionnaire when I circulated it, and I never heard anything further on the matter.

My Personal Guest Lecture Story
A few years after I arrived in Bloomington, I received a call from a faculty member at a university in another state. He invited me to visit his school and give a guest lecture. He said his school might offer me a position. I accepted the invitation, gave the lecture, and met some people there. Shortly after my return to Bloomington, he called to thank me and said an expense check was in the mail. He also said he was embarrassed to tell me there would be no job offer. He said the chief executive officer of a major insurance company based in his state had learned of my visit and had told school officials there would be no further contributions to the school by the company if I was appointed to the faculty. My friend said the school had decided it could not afford to antagonize a major donor. I thanked him for telling me. I did not tell him my immediate thought: a financial threat by a donor to influence a faculty hiring decision is not tolerated by a great university, and I was grateful to have avoided a disastrous career move. That was the first and last time I considered leaving IU.

General Observations
Because of the nature of my research, over the years I learned first hand how IU protects its faculty against censorship. That is why I was surprised to learn about the Sutherland case. I am confident that, if a similar situation arose today, IU would stand behind its faculty member and would, if necessary, publish the research through the IU Press.

Available Material
I am offering a complimentary 9-page PDF consisting of the front matter (6 pages) and Table 3 (3 pages) of the original manuscript. Email jmbelth@gmail.com and ask for the October 2018 package about Sutherland.

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