The 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.