Universal Life was supposed to have been simple where the insurance would be unbundled from its investment component. However this has never truly happened and instead there are many links between these two elements. They are inseparable and indivisible and this gives an open door to the insurer to use the investment to pay for the Cost of Insurance. The result is clear. You have more chances to get kidnap by aliens in the middle of the day while strolling in the middle of New York than being able to achieve the cash values shown on Universal Life illustrations. In fact even the so called experts that offer testimony in court case don’t even understand Universal Life…
Richard. I am not sure I agree with your description of UL as a scam. The Morello vs Nesbitt Burns you refer to indicates the it wasn’t the product at fault but the adviser. You are correct to differentiate between the rate of return and the credited rate of an investment inside a UL but this should be fundamental knowledge of an adviser. If in fact a 6% rate was illustrated the adviser should have documented the difference between the two rates and the risk of underchieving with the client signing off on the disclosure. Back in 1997 disclosure wasn’t as stringent thus it resulted in a more cavalier attitude by advisers.
Even then a good knowldge of UL (and other) contracts is crucial. So it is not the product that is a scam.
Tks John for your comment and question. In fact I will be discussing this on a radio show in the US. Usually products do what they are supposed to do. So usually the product is not the scam. The scam is the representation. For example, if you say that a truck has better fuel mileage than a little car, does this mean the truck is not good and is a scam? No. The problem is with the representation that was made. The scam with Universal Life is the representation that it is an investment. This does not make the UL bad and in fact it is a great estate tool. (please note in the US there is a law that prohibits marketing UL as an investment…we should have the same law). UL is not an investment. It is a great asset but it will never an efficient investment.
Please note that sadly there were and there are still Universal Life that are built as a scam for the same reasons we would call a scam a truck that is knowingly built with faulty breaks. I see in your comment that you do not touch on the minimizer, because you know like me this feature is faulty and does not work. UL with conditional bonus were also a scam; UL with double MER and MER as high as 12.5% were also a scam…
Finally I do not agree with you that illustrations have evolved and are better at disclosing that the illustrated rate is net of MER.
Risk Manager, Money Mentor and Private Equity Specialist
What I find most disgusting about advisors or AGA’s that base their business model on selling this product to middle class Canadians is the fact that it is one of the highest commissions paid – and certainly that was factored into their business model. There is a time and a place for all products but this product is only now being made middle class friendly and in doing so, I see very few circumstances where a Whole Life policy is not a better strategy for permanent coverage. Save the UL for your corporate clients. They are ones that can really benefit from the product.
Founder Financial Services Consumer Alliance
Tks Randy for the comment. I have yet to encounter one client who lost money on guaranteed whole life. Even participating whole life if sold correctly can become a great investment. The problem with UL as investment is that it relies on investing in Index funds. Now if these index investments in UL were truly unbundled from the insurance component, it could work. However the investment is linked with the insurance and the advisor cannot comprehend how volatility can affect the relationship between insurance and investment since the software does not illustrate volatile rate of returns. This is what is amazing. All of the advisors that have sold UL with index funds as investments have no understanding of the impact of volatility since they have never seen one illustration with a variable rate of return… Anyway who would even consider an investment with a MER of 4%, 6% and even 12.5%. Advisors selling UL as investment are able to do so because MER don’t appear on illustrations. Imagine a software illustrating an illustration at 8% showing cash values net of MER at 4% versus what is done currently showing cash value at 8% for an illustration rate of 8% (which means a client has to mentally adjust the rate by adding the MER of 4% which will give 12% return which now means that it is an impossible rate to achieve…) Smoke and mirrors this is how actuaries have described the illustrations produced by their software….
Hi Richard, I was assistant marketing director at the time for National Life when Nesbitt was selling a ton of the minimizer product in Quebec. As you stated the illustrations looked awesome in a perfect world where volatility was non-existant and that you equity investments earned over 5% a year (so that the investment bonuses kick-in). Maritime Life back then was the only company I remember showing illustration with real returns varying from one year to the next. If national Life would’ve provided such a tool, the minimizer would’ve looked like a disaster as per above mentioned lawsuit. I can see how that product was a very profitable investment for the insurance company at the expense of the client’s satisfaction..since MER’s were in the 3.25%+ range and the product was primarily sold with a YRT COI. Unfortunately too many brokers are fooled by a nice illustration and to their defence considering one needs actuarial knowledge to demystify the UL product, the insurance company has to assume greater transparancy when promoting the product.