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…
From the judge Lalande in Morello versus Nesbit Burns
 Lorenzo is a seasoned businessman who works in the field of construction and real estate. During his active professional life, he managed to set aside large amounts of money by investing in various financial vehicles. To do this, he consulted with professionals in the field.
 From 1997 until his death in 2003, he did business with BMO Nesbitt Burns Financial Services Inc. (BMO financial services or the Cabinet) to advise him in respect of financial products that it distributes.
 In 1998, Morello purchased a pair of universal life insurance policy issued by National Life, a life insurance company, called Comptaflex (Police). Lorenzo and Micheline are the two lives insured by this product. The policy death benefit is payable on the death of the last survivor. Their only daughter, Elizabeth Morello (Elisabeth) is the beneficiary.
In suing Nesbit Burns, the Morello retained the services of an expert to explain the sale of this product to the judge. Nesbit Burns also retained the services of an expert. What we found is that the experts like the advisor who sold the policy did not understand Universal Life and as a result the judge was unaware of many important details pertaining to Universal Life
1) Illustration rate of 6%: This is the illustration rate that was used to create the illustration presented to the client. It is important to understand that the illustration rate is equaled to the credited rate and not equaled to total earned rate of return. This does not appear on the illustration and Morello did not know this.
When Morello was shown this illustration he did not know the investment he wanted to select for his Universal Life. In fact, when the policy was issued, the client still did not know the investment he wanted and the money went into the Daily Interest Account. Finally he selected the Bond fund as the investment
If you don’t see a problem with this chain of events, you should not be selling Universal Life as an investment. The client wanted to earn a better rate of return than the guaranteed rate of return available under the policy of 3%.
Judge Lalande stated:
Michel Bertrand established the amount of the sum insured based on the amount of the deposit, the type of sum insured, insurance factors and an assumed interest rate of 6% ;
 He also noted that the insights generated by Bertrand using interest rates of between 6% and 8% were fully justified, given the age of the data.
The MER of the bond fund is 3%. This meant that the client to achieve a credited return of 6% needed to earn 9%. Contrary to the statement of Byren Innes, the expert for Nestbit Burns, a long term rate of 9% was absolutely not justified for a bond fund. It’s even worst for the illustrated rate of 8%. The advisor would have to believe he could achieve a long term rate of return of more than 11% for a bond fund. It is clear that the advisor Michel Bertrand forgot to take into account the MER when he presented the illustrations to the client. This is a grave mistake.
Based on past historical performance of any bond funds, the expected total return would have been around 6%. When we apply the MER, we get a 3% credited return. As a result, there is no upside in selecting a bond fund as an investment in a Universal Life. You can achieve the same rate of return just by selecting the 3% minimum guaranteed rate of return without taking any risks.
2) Morello changed his investment from bonds to equity: This is not surprising since the client could not achieve the illustrated/credited rate of 6% using a bond fund and had to change his investment allocations. Two years later, Morello changed his investments to equity. This is what he received from National Life:
You average annual total return objective is 9.00% over a full market cycle. This is in line with long-term historical experience. However, past performance is not necessarily indicative of future performance.
The problem with this statement is that it is only true if National Life referred to total return of 9%. With MER of 3.5%, this meant a credited return of 5.5%. This is lower than the 6% but there is no evidence a new illustration was done to reflect this rate. However if Morello viewed this 9% as the illustrated rate/credited rate, he would have had to earn 12.5%. This would not be in line with historical performance. What was the 9% for Morello? Was it the illustrated rate or the total rate? Since illustrations don’t disclose this vital information, it is impossible to determine…
3) The minimizer does not work with equity investments that are subject to volatility: Morello selected a YRT COI with the minimizer option to minimize the Cost of insurance and therefore maximize the cash values. Here is the greatest deception. The minimizer does not work for volatile investments. When I was at Maritime Life, we conducted a study on the minimizer. The conclusion was that the minimizer, if investments were volatile, would in fact do the opposite of what it was supposed to do. This is why we created a Stabilizer option to smooth the volatility.
If you don’t understand this, please cease and desist from selling these policies as investments. The point is that to remain tax exempt, you cannot increase the policy death benefit by more than 8%. If cash values fall one year, because the market crashed and as a result the minimizer drops the death benefit by 15%, if the following year, the market rebounds, the death benefit can only be increase back up by 8%. As a result, money will be pushed out of the policy and taxes will need to be paid. If the death benefit is only reduced by 8%, the COI will be 7% to high and therefore the cash values will be 7% too low which means higher COI the following year with the policy entering a negative downward spiral until all CSVs have disappeared. The minimizer option when investment are volatile minimizes cash values. You don’t see this on the illustration because the illustration is done at a constant rate of return.
These 3 things meant that the Universal Life bought by Morello could not function as an investment. It is interesting that in the end Morello’s wife did what should have been done at the beginning; making the purchase of insurance efficient by switching the life insurance to a level COI and choosing to invest at the 3% guaranteed rate of return. It’s too bad that the advisor cost her a lot of money for her to gain this knowledge. She would have been better off without an advisor from the start.