Canadian Court Rules on Life Insurance Investment Scheme

Back in November, we wrote about the possible “squashing” of “investors’ hopes for unlimited returns using life insurance.” At that time, the government of the Canadian province of Saskatchewan altered the regulations for a specific universal life insurance policy that some investors had hoped would be their pot of gold. However, the regulation change did not affect a court case that has since settled in favor of the insurance companies involved, including Manulife.

The policies in question were Canadian current assumption universal life policies that the investors felt set no limit on the amount of money that could be injected into the policies. Similar policies in the United States place restrictions on premium contributions.

According to a white paper we referred to in our earlier report, one of the policies in question had two cash accounts: a tax-exempt account and a taxable account. Cash placed in the tax-exempt account went to pay policy expenses, but an additional amount over and above that cost could also be contributed. Each year on the policy anniversary date, a test would be run, and any cash over a specific amount would be moved from the tax-exempt account to the taxable account to preserve the tax status of the policy. Both accounts guaranteed at least a 4% return (some other policies had up to a 5% guaranteed return), and the tax-exempt account paid an annual bonus of .85 percent on the policy’s anniversary date.

Investors, including private citizens, hedge funds and money managers, purchased policies hoping to take advantage of the guaranteed returns by placing millions into the policies. The outcome could have been catastrophic for the carriers, with a Manulife expert testifying that a $100 million deposit would cause “an immediate reported loss to the insurer in excess of $45 million,” according to the referenced white paper.

The Saskatchewan regulation change limited investors to contributing only an amount equal to the premiums required under the contract. Last week, a judge of the Court of Queen’s Bench of Saskatchewan agreed with the new regulation. According to a Wall Street Journal article, he stated in his ruling “that although the disputed policies didn’t set investment limits, the contracts were designed to restrict investments for such insurance related costs as taxes and fees.” (1)

The judge did rule that the Saskatchewan amendment was not retroactive. The investor group plans to appeal the decision and according to the Wall Street Journal article, “the reversal of the retroactive claim means that if the investors are successful with future appeals of the ruling, the province can’t block their investments under the current act.”

Manulife issued a statement that the investment scheme was a “commercially absurd” use of the policies and that they were confident future appeals by the investors would fail.

We will report back with updates, as warranted.