Insurer Targeted In Probe of Sales Of Hybrid Plans

By KATE BERRY
Staff Reporter

The Los Angeles office of Northwestern Mutual Life Insurance Co. has become a target in an ongoing investigation by the National Association of Securities Dealers into allegedly deceptive sales practices used by agents selling variable life insurance.

The policies, which are marketed to well-heeled clients as tax-sheltered vehicles for transferring wealth, have drawn complaints in California as well as other states. Lawsuits have been filed in Arizona, Idaho and Indiana, where one group of claimants is seeking class-action status.

The NASD investigation has been under way for two years, according to policyholders and a Northwestern Mutual employee familiar with the case.

Several Northwestern Mutual policyholders in Southern California told the Business Journal that NASD investigators have contacted them in recent months about the policies, as well as interactions with the insurance company and promises made by its agents.

Officials of the NASD, a self-regulatory agency that is supervised by the Securities and Exchange Commission, declined comment. However, they provided documents related to two cases against Northwestern Mutual, one dating to 1998 and the other initiated last month.

A spokesman for Northwestern Mutual characterized the NASD activity as an industry-wide probe into all variable insurance products.

A spokesman for the SEC in Washington declined comment.

Hybrid policies

The variable rate insurance products are a hybrid of mutual fund and life insurance. Policyholders said they were marketed as tax-advantaged retirement or wealth-protection vehicles, and encouraged to over-fund them, and then borrow money against the assets.

The complaints revolve around two allegations: that the products didn't generate returns promised by sales agents, and that fees being charged allegedly were not disclosed and are considered excessive by dissatisfied policyholders. Customers also said that questions they had after signing up to the plans weren't answered satisfactorily.

The state Department of Insurance received 10 complaints about Northwestern Mutual in 2001, the most recent year for which it has records, according to the DOI Web site. The site does not detail the allegations in the complaints.

The NASD hasn't indicated the people it is targeting in its investigation. In Los Angeles, a number of the dissatisfied policyholders who have been contacted by the NASD told the Business Journal they purchased their policies from two agents, Robert Kerrigan and Keith Wagner.

"Several people I knew referred Keith to me, saying this was a hot investment," said John Dohm, a former Deloitte & Touche partner who said he has filed a complaint against Northwestern Mutual with the NASD.

Dohm bought his policy in 2000. He remembers Wagner casually dropping the names of well-known individuals who he claimed were also policyholders. But once Dohm had written a check, the agent was unable to explain how the variable life insurance policy worked.

"When I asked for details on the policies they refused to give me the information," said Dohm. "They sell the insurance as a wealth transfer vehicle, but it makes no sense."

Last month, Dohm paid a $15,000 fee to "surrender" the $1.25 million policy.

Calls to Kerrigan and Wagner were not returned.

Dohm said he was contacted by the NASD earlier this year. He then filed a complaint against Northwestern with the association, he said.

Under the plan Dohm purchased, he said, the policyholder over-funds the variable insurance product by contributing up to seven figures in annual premiums. The premiums are invested in a mix of mutual funds offered by the company and the assets are expected to appreciate tax-free.

A policyholder can borrow up to 90 percent of the assets in the policy as a loan, which is not treated as taxable income.

In a 1999 interview with the Business Journal, agent Wagner told then-Wall Street West columnist Benjamin Mark Cole that the variable policies were "a great way to accumulate capital, provide for loved ones, and save money for retirement, college educations, or future investments."

But the policies didn't work out as advertised, Dohm and other policyholders said, because fees typically ate up the premiums being paid.

"If they take out too much money in administrative fees and if how they invest the surplus money doesn't generate enough cash, then down the road you have to put more money in to keep it going," he said. "There are a lot of other fees that aren't disclosed in any way."

Unreported complaints

The NASD is pursuing various enforcement actions, including fines against the insurance company for failing to report those complaints. In an earlier case that was closed in 1998, Milwaukee-based Northwestern paid a $1,000 fine for failing to disclose an arbitration settlement in a timely manner.

Policyholders said some insurance agents failed to disclose certain facts about variable products. Others claim that agents misrepresented life insurance as an investment that would deliver tax-free returns of up to nine percent, or as a wealth transfer vehicle functioning as a tax-sheltered trust for heirs.

"I'm angry about the tactics that were used," said Brian Yost, a trademark investigator in Los Angeles who said he lost $8,000 on a policy he held for two years before canceling. He hasn't taken any formal action against Northwestern Mutual.

Several lawyers told the Business Journal they are considering filing a nationwide class-action lawsuit that would include policyholders in California.

Sidney Jackson, a lawyer in Mobile, Ala. who has represented six plaintiffs in lawsuits against the company, said Northwestern Mutual has been able to defend itself against claims because the statute of limitations for most life insurance policies ranges from two to three years in many states.

"It's very hard for people to understand how this variable life product is supposed to work," he said. "It's like purchasing an expensive Swiss army knife, but when you open the box, it's just a toothpick."

A group of former policyholders who call themselves Policyholder Protection Services Inc., based in Evansville, Ind., have formed a Web site documenting a wide range of allegations against the company.

Keith Clark, a marketing director in Herndon, Va., who bought a $500,000 variable life policy in 1997, cancelled his policy after doing research on the Internet.

"I was sick to my stomach," Clark said after he visited the Web site. "The policy they sold me was not tax-deferred and all the disbursements you think you're going to get are actually loans against the policy."

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