Life Insurer Faces Off Against African-American Church in Battle Over Rates
September 6, 2017 by Leslie Scism
A federal trial in Los Angeles next week will test an increasing concern for Americans: How much leeway do their life insurers have when raising the price on old policies?
In 2004, investors teamed with Praises of Zion Baptist Church in south Los Angeles to take out policies for 2,400 churchgoers in the area, most of whom couldn’t otherwise afford them. The investors receive $225,000 of each $275,000 death benefit, while church-related social-service programs and beneficiaries of the insured mostly African-American congregants split the remaining $50,000.
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The policies were purchased during the peak in “investor-owned” life insurance, an arrangement whereby investors pay the premiums on policies for people who aren’t their relatives.
Long considered taboo, increasing the costs on older policies is becoming more commonplace among insurers as they look to overcome nearly a decade of ultralow interest rates. Insurers earn part of their profit from investing premiums until claims come due, typically in bonds. At least a half-dozen prominent insurers have bumped up prices over the past several years, according to financial advisers.
Praises of Zion Baptist Church and DCD Partners LLC, the current co-owner of its policies, allege that Transamerica impermissibly used race-based data in calculating a 50% rate increase. They have fought back with a lawsuit, saying the jump has added $100 million in costs and makes the program unsustainable.
“There is some evidence from which one might infer that Transamerica targeted these Policies for [a rate] increase because of the race of the insureds,” Judge Christina Snyder, of the U.S. District Court for the Central District of California, wrote in an Aug. 9 ruling on the lawsuits’ claims, moving the case to trial, with DCD as the plaintiff.
Even so, she said her decision “should not be read to imply that said evidence is compelling.” Judge Snyder dismissed claims in the lawsuit including negligent misrepresentation, saying what remains for trial “is principally a contract dispute between Transamerica and DCD.”
The trial, set for Sept. 5, will sort out the exact methodology Transamerica used to raise rates. Race-based premiums have been banned for decades in the U.S.
In a statement, Transamerica called the allegations “categorically false and offensive.” “Transamerica did not raise rates on the policies due to the race of those insured, nor would we ever increase rates based on racial considerations,” the company said, arguing that the increase is permitted under the policies’ terms and meets all legal requirements.
In deciding on the size of the increase, Transamerica said its actuary reviewed the 80 to 90 death claims in the DCD church program as of 2012, then “applied his actuarial training, knowledge and experience” to come up with a rate that would allow the policies to prospectively break even.
Among other things, the actuary took into account interest-rate expectations, according to the insurer. The 50% increase applied “to all policies of the same class,” it said.
Transamerica was one of three large life insurers that increased their rates before 2015 in what, at the time, were considered fairly isolated events. Since then, however, at least five other big insurers have raised rates, according to ITM TwentyFirst, a firm that manages policies for trustees and institutions. The increases range from mid-single-digit percentages to more than 200%.
Increasingly, customers are filing lawsuits to challenge the moves. The DCD case is one of the first to make its way to trial.
It also sheds light on the once-hot use of “investor-owned” life insurance for nonprofit fundraising. Back in the early to mid-2000s, “there was a lot of marketing sizzle around it,” recalls Bryan Clontz, president of advisory firm Charitable Solutions LLC.
A high-profile example was the 2006 “Gift of a Lifetime” program supported by oilman T. Boone Pickens at his alma mater Oklahoma State University. Expected to generate up to $250 million, the plan was abandoned after low-cost financing for premiums dried up in the 2008 markets meltdown.
Eventually, investors “realized that they did not have the expertise to monitor this, nor could they afford to hire the expertise,” said insurance attorney Stephan Leimberg. He and other critics say the arrangements can put charities in the awkward spot of being better off financially if the insured people die quickly.
Under the arrangement with Praises of Zion Baptist Church, $15,000 of each $275,000 death benefit is allocated to help pay for burials, and $35,000 goes to nonprofit social-service programs and churches.
Rev. J. Benjamin Hardwick, senior pastor and founder of the church, said the policies help poor congregants afford proper burials. So far, they’ve paid for 188 funerals. All told, about $50 million of the potential $660 million in death benefits have been paid out, according to his lawyer, William A. Brewer III, of Brewer, Attorneys & Counselors.
“It’s a bitter pill for me to swallow” if the increase stands and investors pull out, Rev. Hardwick said. “People are being buried with dignity…. I know the [financial] condition of these people. They need this insurance desperately.”
Appeared in the September 1, 2017, print edition as ‘A Church Takes a Stand on Insurance.’
