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Responses and non-responses to this article proved fascinating. Very significantly no actuary, life insurance company representative, agent or broker responded to The Financial Post. Evidently they recognized that it was not possible without opening themselves to further embarrassment A former Ontario securities regulator urged, "Keep it up. Don't stop." From a leading Toronto securities firm came a card thanking me for the article and from two partners with a large national accounting firm an invitation to meet. They said it was the first honest article about Universal Life they had ever seen. There were three or four complimentary responses from brokers, but many more of the brainless variety confirming once again that while most brokers and agents don't understand the policy they sell with enthusiasm, they do understand that U.L. sales earn them fat commissions.
A fascinating e-mail response from Montreal began, "How I wish my dad had read your article many years ago." Written by a hedge funds analyst, it related how this man's father (unknown to the son) had purchased a U.L. policy with coverage for $2.1 million. As arranged when applying for the policy, his father was required to make just five premium payments of almost $100,000.00 each over five years. However, after making the fifth and "final" payment he received a notice from his broker informing him that because the investments (fixed income) in the policy had rot performed (as per the `illustration' provided at time of sale) the policy could well lapse before he died. In effect, should that occur there would be no death claim payout and a straight loss of the almost $500,000.00 paid in premiums! The notice urged him to pay more into the policy to ensure it did not lapse (expire). Unfortunately he complied, but soon after involved his son who discovered a disgraceful circumstance. A seasoned investor, it quickly became evident to him that after receiving only the policy's first premium the broker and insurance company knew the policy could not survive without additional premiums beyond the five required when the policy was sold. But rather than spoil a good thing for themselves, they let this gentlemen continue paying premiums into what had become a bottomless Universal Life pit. After all, commission to the broker was paramount!
Mistakenly the father had assumed that the policy, premiums, and all conditions were guaranteed and coverage would exist till death at any age. In effect, he never was informed that a U.L. policy is `adjustable' and thus not guaranteed - an all too typical circumstance in the sale of Universal Life!
Important lessons to be learned from this case begin with the feet that U.L. is not a guaranteed policy. An `Illustration' provided in the course of a sale is not worth the paper it's written on; it does not accurately forecast what will occur over the duration of the policy. 'The Cost of Insurance (C.O.I.) in a U.L. does not equate to the premium - no matter how hard an agent or broker tries to convince you it does - and even if the C.O.I. is guaranteed, the premiums are not. Further, despite some components in U.L. policies being guaranteed, premiums never are. Life insurance companies want policy-owners to assume risk for their own policy's performance and Universal Life provides insurers with the tool for this circumstance. Insurers want out of the risk business and into what they call `Wealth Management'. Rather call it `Wealth Damagement' because that is what this Montreal gentleman and thousands of others U.L. policy-owners have discovered.
The hedge finds analyst, subsequent to his father's experience, did various investigations and exercises comparing the performance of U.L. policy invests against "an identical basket of investments" inside a non-RRSP. It graphically revealed that the consumer is better off investing in non-RRSP investments. Even after paying annual taxes the non-RRSP investments will outperform those in a U.I - despite the latter being tax-sheltered and thus un-taxed. Further, if the U.L. is cashed-in before the death of the insured, either the entire accumulation or most of it (not just capital gains) will be taxed at the owner's maximum marginal tax rate. In the process the investment is significantly depleted.
To their credit the independent Financial Services Brokers of Canada re-ran this article in their glossy bulletin. From brokers the mostly hostile responses on the IFBC website were a wonder to behold. Some condemned IFBC for publishing the article "without rebuttal." For years brokers and agents had ban given five-rein to misleadingly promote U.L., but just one U.L expose' had them apoplectic and howling for a rebuttal. One financial planner, in a lengthy response, among other things described U.L as a "legitimate wealth management tool" and an investment policy that provides life insurance (for the oh so lucky investor!). An actuary consulted over this financial planner's extravagant and foolish claims about U.L. could barely contain his mirth. With some sarcasm I responded on the IFBC website. It silenced further discussion.
One life insurer, responding to a businessman's request for a written guarantee that the U.L. policy (with $15 million coverage) he was considering would never lapse (expire), wrote to assure him the policy would never lapse provided "all the following conditions are respected." The 12 conditions they then listed effectively killed all the `flexibility' that is supposed to make U.L attractive. Worse still, below the listed "conditions" the letter ended: "Finally, even if all the above conditions are respected, (we) cannot guarantee that the policy will not lapse if future government taxes are implemented and adversely affect the values of the above policy." A rock solid guarantee to be sure!
A U.L. policy I recently examined promised from its GIC investments 90 percent of the guaranteed interest return, less 1.75 percent In a U.L. this is not uncommon. Why would anyone fall for such a miserable `plan', let alone believe they will get better returns inside a U.L? Some consumers do because they don't carefully examine the U.L. contract, are lured by either the `tax sheltered investments,' or news that a tax-free retirement loan can be secured against `the policy.' Seldom is it explained what is required to secure a loan, the risks accompanying a loan, and often they are not informed that a loan (if able to be secured) is based on only a percentage of a policy's cash value/investment.
Today the disgraceful reality is that the biggest, most reputable, investment/financial planning companies in Canada have taken to promoting Universal Life as if it is a divine gift to this planet. With most investments doing poorly and sales suffering, brokers and financial planners who once handled investments exclusively are looking for alternative ways to earn high incomes. Their solution? Sell universal Life; present it as primarily an investment policy and hype the `tax-sheltered' status. The illusion created is that investments inside a U.L. will perform brilliantly while those outside languish in the doldrums.
How on earth can this be factual? It can't and isn't. Investments inside a U.L only `mirror' the performance of those outside, and those outside are not subjected to the high management fees of U.L.. Before premium goes into the investments portion of a U.L. policy, it is depleted by the C.O.I for life insurance coverage, provincial premium tax, and policy charges and fees. Little wonder an associate with a large, bank-owned, securities company recently wrote to a friend, "My 'imbedded' insurance expert (with his company) tells me that of the hundreds of U.L.'s annually written up in this office, only two are on track." Supposed by "on track" he meant that the two policies were performing as projected in the `Illustration'. Very encouraging for those two policy owners, but I recommend they don't hold their breath.
One last word - Never, never, allow anyone to convince you to cancel your tax-sheltered, rebated, RRSP in favour of transferring the funds to a Universal Life policy. Only self-saving charlatans recommend such a disastrous move.
R.J.
(Bob) Porter
© , Fiscal Agents Money Management Newsletter 
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