United States: Life and Annuity Series: Cost-of-Insurance Charge Litigation

Plaintiffs' lawyers have been challenging cost-of-insurance (COI) charges for years, with mixed results. The following outline reviews the most recent flurry of cases. 
1. The Phoenix Life Decision
In Fleisher v. Phoenix Life (April 2014), the United States District Court for the Southern District of New York rejected in part the policyholders' claims that COI increases were not justified by the terms of the Universal Life contracts, but left the door open on two other issues.
Specifically, the policyholders alleged that their UL contracts only permitted an increase in their COI rates based on six enumerated factors in their policies: "expectations of future mortality, persistency, investment earnings, expense experience, capital and reserve requirements, and tax assumptions." Phoenix Life allegedly breached those contracts by: (1) increasing COI charges for policyholders who had "low funding rates" and low policy values, (2) applying discriminatory COI increases against only a certain "class" of UL holders, and (3) designing the COI increases to recoup prior losses, not address future expectations. These claims were based on similar allegations by the NY Insurance Department that had been settled by Phoenix Life.
The court determined first that the six factors enumerated in the contracts were "exhaustive," not "illustrative," and thus unambiguously prevented Phoenix Life from increasing COI charges based on other factors. However, the court went on to decide that Phoenix Life could raise the COI based on policyholders' funding rates and policy vales, as they were logically tied to one of the six factors: the company's expectations of investment earnings.
The court thus granted Phoenix Life's summary judgment motion in part. But it held that there was a question of fact as to whether the insurer had unfairly discriminated by imposing the  COI increases only on two groups of policyholders without a proper underwriting basis (i.e. for profitability, not actuarial, reasons). The court also held that there was a question of fact whether the COI increases were to recoup prior losses rather than for future expectations.  
2. The Lincoln National Decision
Lincoln National Ins. Co. v. Bezich (June 2015) also turns on whether the permissible factors for a COI increase are limited by the terms of the life insurance policy. 
The Indiana court of appeals held, in certifying a class, that the policy language unambiguously prevented Lincoln National from "pad[ding] the COI rate" with expenses unrelated to mortality expectations. It relied on policy language stating: 

"The monthly cost of insurance rate is based on the sex, issue age, policy year, and rating class of the Insured. Monthly cost of insurance rates will be determined by the Company based upon expectations as to future mortality experience."

In the court's view, this language connoted "exclusivity": only mortality factors could be considered in setting COI charges. The court also criticized what it called Lincoln's "absurd" interpretation of the COI rate provision to permit Lincoln to unilaterally increase COI rates to reflect worse-than expected mortality, but not reduce those rates in the event of mortality improvement. The court disapproved of Lincoln's "heads we win, tails you lose" power. 
3. The AXA Equitable Complaints
Two class action complaints against AXA Equitable (SDNY and S.D. Fla. Feb and March 2016) pursue the theory that COI increases must be based only on the specific factors in the contract, but also raise the claim that COI increases unfairly discriminate among classes of policyholders.
Specifically, both of these complaints allege that AXA's UL policies were originally marketed based on the promise of "minimum premium" payments, but that the company later "targeted" for COI increases the policies that had lower accumulated policy values based on those "minimum premium" payments. The COI increases allegedly forced policyholders to either pay newly-increased premiums not justified by the death benefits, or to lapse their policies and "forfeit" premiums already paid. AXA purportedly was recouping profits it lost due to the underperformance of its policies overall.
The class complaints assert that the COI increases were not permissible under the AXA contracts, which provided for COI increases only based on "assumptions as to expenses, mortality, policy and contract claims, taxes, investment income, and lapse...." Similarly, plaintiffs asserted that AXA's COI increases were not based on reasonable actuarial assumptions, since mortality experience has improved substantially overall, and AXA had reported in its 2014 annual statements that its experience factors had not changed. Finally, the COI increases were claimed to have discriminated against certain groups of policyholders—those who "minimum funded" and those with issue ages over the 70 with current face values of more than $1 million, without a reasonable actuarial basis.
4. The Banner Life Complaint
The class action complaint against Banner Life (D. Md. Jan. 2016) asserts a new theory for why COI increases are not justified by the contract language: Banner Life's COI increases were improperly driven by its "captive reinsurance" arrangements that had caused financial problems, and thus the increases were not based on unexpected investment, mortality, lapse, and expense experience that would be justified under the contracts.
The plaintiffs also try to distinguish themselves by pointing to their "no lapse guarantee" policies. They say they were induced by Banner Life's falsely-optimistic financial statements into making "excess premium" payments (and locking up money in the policy), rather than making "minimum premium" payments (and thereby retaining more financial flexibility) if Banner had made accurate disclosures about its captive reinsurance arrangements.
Finally, this complaint sets forth more specific policy data than usual, which allegedly show that the size of Banner Life's COI increases was not justified based on reasonable actuarial assumptions. These allegations make it more difficult to dispose of the case as a matter of law.
5. The Transamerica Complaint
The class action complaint against Transamerica Life Insurance Company (C.D. Cal, Feb. 2016) skips past the policy language altogether, alleging that Transamerica improperly increased its COI rates to address losses it has incurred on above-market interest guarantees in its policies.
Instead of setting forth the actual policy language governing COI increases, plaintiffs allege that a "reasonable policyholder" would have interpreted Transamerica's UL policy to only permit COI increases based on increased mortality rates. They then go on to assert that increased mortality could not have been the real basis for Transamerica's COI increases, as mortality rates have been dropping overall for the general public. Moreover, Transamerica had represented to regulators in each of the prior four years that there was no expectation of the need to increase COI rates, as part of "captive reinsurance" arrangements that permitted Transamerica to upstream dividends to its parent Aegon. The real reason for the COI increases, plaintiffs suggest, was so that Transamerica could either offset the above-market guaranteed interest rates on its policies, or alternatively cause policyholders to terminate those high-interest policies to avoid paying the increased charges.
The complaint alleges that Transamerica breached the UL contracts because even if the COI increases were based in part on legitimate factors, the size of the increases meant that they must have resulted from impermissible factors as well. The complaint also asserts claims for unfair competition based on the misleading marketing of these policies, and elder abuse claims based the disparate impact that these COI increases have on elderly policyholders.
6. Observations

  • Plaintiffs continue to construct reasons why COI increases are not based on legitimate factors enumerated in the standard contract language. In light of these efforts, it is important for companies to carefully support any COI increases with actuarial assumptions that fall comfortably within the factors permitted by their contracts, and that fully support the fact and the amount of the increase.
  • Since the Phoenix Life court was receptive to claims that COI increases cause "unfair discrimination" and "recoup lost profits," companies should expect more of those allegations. The Transamerica complaint also raises the risk of more elder abuse claims.
  • These COI complaints are likely driven by life settlement holders, who hold large face amount policies originally purchased by elderly policyholders, and who have based their yield projections on paying low minimum premiums that will now be significantly increased.
  • The AXA complaints foreshadow COI increases being cast as "sales practice" claims. Those claims may eventually question:
    • Whether companies knew some time ago that mortality expectations for certain classes of policyholders would grow worse over time, but nevertheless maintained COI rates at artificially low levels in order to sell more policies, knowing that they could raise rates after they "locked in" policyholders with surrender charges; and
    • Whether companies knew that life settlement companies were buying their policies, which would eventually reduce lapse rates, policy values, and investment results and thereby cause COI charges to go up, but nevertheless maintained COI rates at artificially low levels despite this knowledge, all in order to sell more policies (again knowing that surrender charges would "lock in" those policyholders).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.