Policy Architects

Life Insurance Investment Options: The Saskatchewan Court of Appeals Case

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James Heidebrecht Life Insurance Investment

Life Insurance Investment Opportunities: What You Need to Know 

A lot of people wonder about life insurance investment opportunities. As a rule of thumb, I don’t see life insurance as an investment.

For 90% of people looking for coverage, life insurance is simply a way to recover lost income when someone dies unexpectedly. 

For the other 10%, it’s:

  • vehicle to leave cash to loved ones or a charity upon your death
  • mechanism to help alleviate your tax burden
  • means to set up a trust for future generations
  • way to generate some income for retirement

There are legitimate ways that life insurance can create a profit for the very wealthy.

In fact, using life insurance as an investment is an issue that’s being thrashed out in the Canadian courts as I write this. 

Let’s find out all the details now!

Why Am I Writing These Articles? 

My name is James Heidebrecht, the Founder of Policy Architects. We are a boutique agency here in Canada. Our goal is to build relationships. In a world where algorithms, technology, and call centers rule we aim to make roots the old fashioned way – through relationships one step at a time. 

Hey, while we may not sell you a policy today, you’ll always get the best possible advice when you call. So when the time comes to pull the trigger you’re in the know. This translates into serious savings. 

I started this site because I wanted to give potential clients a place to read about issues that will help them navigate this very complicated industry.

If you ever have a question, give us a ring. The advice is free and there’s no obligation. Pretty good deal if you ask me.

Permanent Policies CAN and DO Have Investment Components 

While I don’t encourage clients to look for life insurance investment opportunities to make lots of cash – life insurance DOES often include an investment angle.

If you are a bit confused I am not surprised. 

Permanent life insurance typically has a cash value accumulation component. How does it work? A portion of each monthly premium you pay is reinvested in your policy and compounds over time to build up extra money.

This nest egg grows tax-free or tax-deferred depending on whether you touch the money before you die or it’s left intact for your beneficiaries.

While you’re alive, you can borrow against this cash value without triggering income tax. Meanwhile, the investment account remains untouched and continues to compound and grow. Over a long period of time, the amount of tax-free growth can be quite sizable.

Some of these products utilize the stock market to optimize this cash value accumulation feature and you can go any number of routes. There are investment options for those who are risk-averse and investment options for those who are willing to gamble a bit.

So YES, you can invest portions of your life insurance to make more money or generate retirement income...

…BUT life insurance isn’t an investment in and of itself. Quite honestly there are better places than life insurance to park your cash if you want to see a great return.

The thing is there are a lot of creative people out there. Especially those who have a lot of cash. One such endeavor has gained the attention of the legal system.

Life Insurance Investment: A Big Loophole Being Fought in Saskatchewan

Well, well, well! It seems that some big investment firms found a BIG loophole that is causing a big headache for the life insurance industry AND the government of Canada.

One of these companies purchased a Universal Life Policy from an individual and then planned to make unlimited deposits into the investment account of the policy.

Their intention was to also allow other parties to participate in the investment and reap guaranteed returns of at least 4%. In layman’s terms, they wanted to use a product created for insurance purposes as an investment vehicle on steroids! 

Usually, I would say life insurance companies are more than on top of things, but it looks like they may have gotten a little more than they bargained for…

Hedge funds including Mosten Investment LP, Ituna Investment LP, and Atwater Investment LP sued the insurers, arguing they were allowed to invest unlimited amounts of money in accounts associated with those contracts and earn guaranteed returns over the lifetime of the policies.

Manulife wins court battle as hedge-fund claims dismissed against life insurers, Globe & Mail

Ouch! I bet someone lost their job over this one.

Anyway, the Plaintiffs wanted to continue stuffing unlimited funds into these policies to extract guaranteed returns.

This is not something the life insurance companies envisioned when they created the products, so it came as a surprise when they were being used this way.

In fact, this usage may actually cause them to declare bankruptcy if it continues unabated. Something that is concerning for the insurers and the government alike.

In March 2019 the Courts Dismiss Lawsuits Against Manulife, BMO & Industrial Alliance 

So far the lower courts aren’t buying it. In three decades no one ever used Universal coverage to achieve these goals. The judge agreed with the insurers that the Plaintiffs are using the policies in a way that they were never intended to be used.

Universal life isn’t meant to be a deposit or investment contract.

“The purpose of an insurance policy is to protect the lives of the insured and their families…Insurance policies are not intended to offer an unlimited investment opportunity completely unrelated to insurance coverage.”  Stephen Frank, CEO, Canadian Life & Health Insurance Association (CLHIA)

In a nutshell, this isn’t the sort of thing that is going to REALLY impact 95% of life insurance consumers. This is about wealthy folks who can afford to stuff their policies with millions of dollars.

BUT it has had knock-on effects for the industry.

Is This the End of the Story? Appeal In Saskatchewan 

The case in question will test whether a group of investors can continue collecting a guaranteed interest rate from several years-old life insurance policies that come with a guaranteed interest rate and no cap on contributions.

While the investors maintain that the terms of the contracts allow them to keep putting money into them, the insurance companies involved insist that the policies were not intended to be used that way and that the practice could ultimately bankrupt them.

Government could have been more transparent about insurance changes: Morgan, Saskatoon Star Phoenix

This is not a done deal. While the life insurance companies celebrated a victory in a lower court, the plaintiffs are appealing the decision.

During the first trial, new provincial regulations were implemented to close the loophole that led to this whole debacle.

In an effort to protect the insurance industry, it also appears the government was less than transparent while doing so.

The plaintiff claims that life insurance companies can’t go back to retroactively apply the new regulations.

We shall see what the future holds when the Supreme Court makes its ruling.

Life Insurance Investment Vehicles Like This Aren't for You & Me 

Although this litigation seriously impacts the life insurance industry and its future the actual details of a maneuver like this don’t touch you and me at all.

Sure theoretically if the plaintiffs win the appeal and create an issue where companies like Industrial Life, Manulife, and BMO go bankrupt this will impact us all…

…but I think it’s highly unlikely. 

Also as an aside, the insurance industry in Canada is highly regulated.  Consumers are protected by the government through Assuris, a non-profit agency that basically guarantees all life insurance policies in Canada.

Assuris was created to fulfill a duty to consumers under the Insurance Companies Act of Canada. Basically, if a life insurance company goes out of business, Assuris steps in to make sure the company stays solvent and policy owners retain most if not all of their benefits.

Call Policy Architects TODAY 

If you are considering life insurance investment options – I highly recommend speaking to a knowledgable independent agent if you think this is the right choice for you.

Sure you can get a permanent policy and invest your cash value in an indexed fund. There are lots of options out there if you want to go down this path.

These are complicated products and you need some solid advice. 

BUT for the most part life insurance is used by people like you and me for income replacement, gifts, and final expenses.

If you are looking for coverage give us a call today. We can help you find the right protection for your loved one’s today.

Life Insurance Investment Policy Architects

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