Maria and Robert invested in a universal life insurance policy. Their life agent showed them that they could use the policy when the second of them died, to pay off all the taxes that their investments and RRSPs would create. They could transfer their whole estate - intact - to their children. All they needed was 5 payments totaling 50% of the face value of the policy. Growth in the investments would look after the rest. After they retired, the markets "corrected". Their agent told them they had to put more money into the policy, or the policy would terminate. Money they did not have. How could this happen?
Face or fund
Maria and Robert wanted to have a specific death benefit. This was not just a growth investment. So they chose a policy option that charged them for insurance only if their investment fund was less than the death benefit, or face value. As their fund grew, the insurance company only charged them for the cost of insurance that was the face value less the fund value. As the fund grew, this difference would disappear.
At the beginning of discussions before they bought the policy, the life agent presented them with an illustration to show 5 annual payments. The growth in the investments paid the premiums and built up a profit that became greater than the face value of the death benefit.
In fine print, the illustration said that these projections were not guaranteed. Nowhere did the illustration show what happened if the investments dropped in value during a market downturn. The illustration showed the returns of the best equity funds, not the long term interest rates the insurance company guaranteed.
With the guaranteed rates, the policy would not grow to reach the necessary death benefit. Maria and Bill were not told this.
A race against time
To create the best chance to grow the investment fund, the agent recommended a YRT, or yearly renewable term, cost of insurance option. This reduced the cost of insurance in the early years, allowing more of the premium to be invested. But, the rates rose when Maria and Bill aged. This meant that the investments had to rise to the face value of the death benefit before the rising COI cannibalized the funds invested.
Worse, when the markets dropped in the first years of the policy, the fund that remained after paying the cost of insurance had to earn 10% returns, and then 15% returns, to meet the goals of the illustration.
Charges to the invested fund
Maria and Robert were also not told that their invested funds tracked a pool of stocks and bonds. They did not own those securities. Worse, the insurance company charged them with a 3% fee to participate in this tracking investment. While the Canadian Stock Market did rise by 6% annually - on average - they would only get 3% of that after fees. And this was not enough to meet the goals in the illustration.
The only guarantee is compensation to the agent and insurer
Maria and Robert saw that their fund was not growing as they expected. They called their agent. They wanted to get out of the deal. Their agent told them that the cash surrender value was only half of what they had left in the fund. This was because the insurance company charged a penalty to quit earlier than 10 years. This assured the company it would recoup all that it had paid to the agent, and keep a profit for itself. Maria and Bill were trapped, indeed.
The bottom line
Sometimes, people like Maria and Robert are best off to let their estates pay the taxes on their deaths. No one wants to pay taxes, but the government makes it tough to avoid them. Life insurance appears to offer an out - but that appearance comes at a cost and with risks. It seems that Maria and Bill were not told either the true costs or the extent of the risks. They wished they had never met either the agent or the company whose interests the agent was advancing.
If you or people you know have run into a situation like this, you should consult a lawyer familiar with life insurance issues. At MBC Law Professional Corporation, we know this area. Better, we have a track record of getting compensation for clients who have suffered losses in life insurance cases.
If you have a claim because of the poor advice or performance of a life insurance agent, contact the experienced lawyers of the Financial Loss Advisory Group of MBC Law Professional Corporation. For more information, visit www.lifeclaimdenied.ca.
Harold Geller is a founding member of the FLAG, the Financial Loss Advisory Group of MBC Law Professional Corporation. He is often consulted by regulators and consumers organization about life insurance industry issues.