7 On Your Side investigates insurance company accused of acting in bad faith

Is there a life insurance bubble that is about to go bust?

Life insurance buyers have two main options: term insurance that only pays if you die, or an insurance policy that has a savings or investment feature. That is often called universal or whole life. It's those types of policies, universal and whole life that we are talking about.

Transamerca Corporation no longer has its headquarters in the iconic Transamerca pyramid in downtown San Francisco. The signature building is still a part of the companies logo along with the words, "Transform tomorrow."

Mary and Gordon Feller bought Transamerica policies back in the 1980s and say the company has indeed transformed their tomorrow.

"The projections we were given were based on eight percent interest rate and there was never a time where the policies earned eight percent," Mary Feller said. "Now, suddenly the cost of the insurance has skyrocketed. So when we put in $250 or $500 or $700, or whatever we put in on that quarterly basis, that money is eaten up."

"Well, here we are 25 years later. The baby boomer generation is ready to retire. Now the companies say, 'Whoa, we've got to make good on our promise? No, we're walking away,'" said the Feller's attorney Harvey Rosenfield.

A recent letter sent to the Fellers and other policy holders told them Transamerica was increasing the cost of insurance by 38 percent. Now a class action lawsuit has been filed by Consumer Watchdog, which accuses the company of bad faith.

7 On Your Side requested an on camera interview, or a written statement from Transamerica and the insurance giant wrote, in part: "We understand that policy owners are grappling with the performance of older universal life policies that were sold during a time of higher interest rates, something which is not specific to our customers, but is the case across the industry."

An online search finds multiple articles concerned with these types of issues.

Also concerned is Stephen Prater, a former insurance law professor at Santa Clara University for 30 years. He says he doesn't see a basis in the law for Transamerica to take the position it is taking.

"They make a promise, they've got to keep the promise," Prater said. "Insurance is like a legalized gambling business. You take money in exchange for a promise, and there's no right or guarantee that you're going to make a profit. You win some, you lose some."