FINRA Suspends Financial Advisor Over Unsuitable Variable Universal Life (VUL) Sales Practices

shutterstock_186471755The Financial Industry Regulatory Authority (FINRA) sanctioned broker James Moniz (Moniz) concerning allegations that while registered with Signator Investors, Inc. (Signator) Moniz made unsuitable recommendations to a married couple that they purchase a Variable Universal Life insurance policy (VUL) on the husband’s life and use the proceeds of a reverse mortgage to purchase a variable annuity and open a managed investment account. According to FINRA, after the insurance company questioned the VUL application, Moniz caused the application to be re-submitted with changed or added information without first informing the customers of his actions. FINRA found that Moniz also inaccurately represented the source of funds for the variable annuity and managed account.

VUL are complex dual part insurance and investment products that investors must fully understand the risks and benefits of prior to investing. One feature of a VUL policy is that the owner can allocate a portion of his premium payments to a separate sub-account that can be used to grow in value through investments. The other part of the investment is the life insurance policy where the policies monthly charges including a cost of insurance charge and administrative fees are deducted from the policy’s cash value. The cash value of the policy may increase or decrease based on the performance of the selected investments. However, customers must be careful in purchasing VULs because the policy terminates, or lapses, if at any time the net cash surrender value is insufficient to pay the monthly cost deductions. When the policy terminates the remaining cash value becomes worthless.

Given the costs involved in purchasing VULs, brokers must be careful to ensure that the recommendation to invest in VULs is suitable for the client. While an investor may be able to afford the initial purchase price of the policy it may be too expensive for the client to continue to make premium contributions over time causing the policy to lapse.

FINRA found that two of Moniz’s clients maintained two term life insurance policies on the husband’s life. The first policy provided a death benefit of $100,000 with an expiration date of December 3, 2014, when the husband would be 77 years old. The second policy provided a death benefit of $200,000 with an expiration of April 6, 2017, when the husband would be 79 years old. The annual premium for the two term life policies was $1,855. Moreover, FINRA found that even if the husband passed away after the term policies expired the couple had sufficient assets available to meet the spouses’ needs in retirement.

Nonetheless, FINRA found that Moniz recommended the couple purchase a John Hancock Life VUL on the husband’s life with annual premiums of $11,826 and a benefit of $310,000. After the purchase, FINRA alleged that the couple became concerned about the very high cost of the VUL that was approximately six times the premium cost of the term life policies. FINRA found that although the VUL provided life insurance coverage for a longer period than the term policies, Moniz’s recommendation to purchase a VUL at a cost of almost $12,000 per year in premiums was not appropriate for their needs.

The attorneys at Gana LLP are experienced in representing investors in securities litigation matters concerning variable annuities and VULs. Our consultations are free of charge and the firm is only compensated if you recover.