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.

  1. Canadian Insurers Win Court Battle Over Investment Strategy, Jacquie McNish, Wall Street Journal, March 18, 2019

ITM TwentyFirst Alert: Lawsuit Filed Against John Hancock for COI Increase

In February of 2017 we reported John Hancock had placed restrictions on certain inforce illustrations. At that time, we mentioned this was a possible precursor to a cost of insurance increase.  A year later the carrier notified the New York Department of Financial Services that it would be raising the cost of insurance (COI) on some Performance UL policies. Last month we reported the first customer announcements for the increase arrived at our NYC office.  Just as COI increases seem to follow inforce illustration limitations, class action lawsuits seem to follow COI increases.

Last week (June 5th), a lawsuit was filed in the Southern District of New York against John Hancock for “an unlawful and excessive cost of insurance (“COI”) increase” on “approximately 1,500” Performance UL policies.

The lawsuit details policy COI increases of 17%-71%, in line our with analysts’ findings.  The lawsuit alleges that increases up to 71% are “far beyond what the enumerated factors in the policy could justify.”

Letters announcing the increase blamed it on “expectations of future mortality and lapse experience,” but according to the suit “mortality expectations have continued to improve” and lapse experience, though “deteriorating…cannot justify any increase, much less one of this size.”  In addition, the recent tax cuts, “should have led to lower COI rates” since John Hancock recently announced, “the U.S. tax cuts will save it $240 million per year going forward.”

According to the filing, the carrier “told regulators as recently as February 2016 that its expectations did not warrant any change in projected COI rates,” and the lawsuit alleges John Hancock “admits” the increase was “driven” by the carriers’ goal to raise or meet its “profit objectives,” which is “not one of the enumerated factors a COI rate increase can be based on.”

The suit asserts the increase is “discriminatory and non-uniform” and “there does not appear to be any actuarial justification for the differences in the amount of the COI increase between policyholders.” For example, “the increase was applied to a standard male insured with issue age 73, but not to a standard male insured with issue age 65, and there is no actuarial reason to treat those two policies in such wildly disparate manners.”

The lawsuit calls for, among other things; compensatory damages and restitution and the “reinstatement of any policy that was surrendered or terminated following Defendants’ breach and unlawful conduct.”  The filing also calls for the court to prohibit John Hancock from collecting “the unlawfully and unfairly increased COI amounts.”

We have been analyzing the nature and amount of the COI increase and will be reporting back shortly on our findings.

A copy of the lawsuit can be obtained by emailing

First John Hancock Cost of Insurance (COI) Increase Letters Arrive

In February of 2017 we reported John Hancock had placed limitations on inforce ledgers for certain Performance UL policies.  A year later, in February of this year, we wrote that The Life Settlements Report, a trade publication, reported that John Hancock had voluntarily notified the state of New York that it would be raising the cost of insurance (COI) on 1,700 Performance UL policies.

Today, our New York City office received the first official COI increase announcement from the carrier.  The letter, dated May 7th, noted that the carriers’ “expectation of future experience has changed” and for that policy, the cost increase would occur on the next policy anniversary date.

The carrier provided several “options to manage the increase,” including; increasing the premium to keep the current death benefit in force, reducing the death benefit to “keep the current premiums the same,” or maintaining both “current death benefit and premium payment,” though if that option were chosen, “your policy will not remain inforce as originally projected.”

The carrier also offered the option to surrender the policy, though they “strongly encourage” policy holders “to consider the value of your policy and the goals you established when you purchased it” before taking that course.

The carrier provided an 800 number to contact “dedicated service representatives” for assistance and “personalized information and illustrations specific to your policy,” and noted they are “committed to working with” policy holders to choose an option that “best meets their needs.”

We are not sure of the size of the COI increase. According to a John Hancock representative contacted by our New York City office, the amount of the increase will vary by policy.   The representative also noted that roughly 4,000 Performance UL policies were evaluated and approximately 1,400 will be affected by the increase, though we cannot officially verify that.

It appears that inforce illustrations for the policies affected will begin to flow in the next few weeks, and as they are received and analyzed we will report back on our findings.

Carrier Offers Life Policy Buyback – Another Trustee Decision Dilemma

Lincoln National is offering some policy holders the opportunity to receive an “Enhanced Cash Surrender Value” if they surrender their life insurance policies within a specific time frame.  We began to receive letters from the carrier a few weeks back, along with a Frequently Asked Questions (FAQ) brochure explaining the offer.

The offer is not unlike offers extended to variable annuity policy holders after the 2008-09 financial crisis. At that time, holders of variable annuities with guaranteed minimum income benefits (GMIB), typically in the 6-7% range, were offered additional incentives over and above their annuity’s value to surrender the contracts.   Those offers continue today with two carriers in the last few months reportedly “enticing” consumers to surrender their annuity “in exchange for some incentive such as a cash lump sum or another product from the insurer.” In fact, variable annuity buyout offers have occurred “among at least one or two carriers every year for the past four to five years.” (1)

According to a report by Moody’s, “companies selling VA’s with guarantees misestimated and underpriced” the product. The mistake “forced insurers to take significant, unexpected earnings charges and write-downs.” (2)

Lincoln’s offer is the first enriched buyback offer we have seen for life insurance policies. Some policies offer a contractual return of premium or enhanced value to surrender a policy at specified points in the future, but we have never received an unsolicited offer.

According to information from the carrier’s FAQ, the offer is being extended to those policy holders who have “stopped making regular payments” on their policy, and it is determined by a formula based on policy “cash surrender value, the length of time…[the]policy would remain active without future premium payments, and an actuarial calculation incorporating mortality and interest assumptions.”

Like carriers offering variable annuity buybacks, Lincoln will be helped by releasing reserves tied to the policies. According to the FAQ, “Lincoln must hold financial reserves in accordance with statutory and accounting regulations.” If a policy owner surrenders the policy, “Lincoln would no longer be responsible for the death benefit on the policy, allowing the release of these financial reserves and redeployment of the funds for a different use. This option could be mutually beneficial to both you and Lincoln.”

So, does it even make sense to surrender a life insurance policy – even if receiving an enhanced value? It depends on specific facts and circumstances, like all policy decisions. For these policies, no out-of-pocket premium is being paid. How long will the policy last without additional premium costs? What is the health of the insured? Will the policy last past the life expectancy of the insured without additional cash contributions? If not, how much more cash would have to be put in for the policy to run to life expectancy? Should a life expectancy report be obtained to provide another data point? These are some of the questions that must be asked before a decision is made. Lincoln believes that buying the policy back for an enhanced value makes economic sense for them. If you are a trustee, you will have to decide whether it makes sense for the trust and document the prudent decision-making process to reach your conclusion. It is all part of a trustee’s job.


  1. Insurers Still Grappling with Costly Variable-Annuity Promises, April 13, 2018, Greg Iacurci,
  2. Moody’s Investors Service, Unpredictable Policyholder Behavior Challenges US Life Insurers’ Variable Annuity Business, Global Credit Research, June 24, 2013

Lawsuit Filed Against Phoenix for 2017 Cost of Insurance (COI) Increase

On April 19th, a class action lawsuit was brought in the Southern District of New York against PHL Variable Life Insurance Company (Phoenix) for subjecting policyholders “to an unlawful and excessive cost of insurance (“COI”) increase” …“in violation of their insurance policies.” We reported on the cost increase in August of last year.

A 2010-11 COI increase resulted in a 2015 settlement against Phoenix for more than “$130 million in monetary and non-monetary benefits” and the carrier agreed not to increase the COI on those policies until after December 31, 2020.  Some of the policies affected by the 2017 increase were policies that were part of that lawsuit.

Per the current lawsuit, the 2017 increase is occurring in three stages: first, certain Accumulator (I, II, III, and IV) and Estate Legacy Universal Life universal life policies not part of the prior settlement class would have increases occur on their first anniversary date after November 2017, second, those policies part of the settlement would see increases after December 31, 2020 and third, for “other policy owners, Phoenix will impose the 2017 COI Increase on December 31, 2020 but then rebate to those policyholders the amount of the increase.” The suit contends that this last stage represents a “special side deal” with “institutional investors” that violates the “uniformity requirement” of the contract. The suit also alleges the increase discriminates “within a class of insureds based on whether they were subjected to the 2010 and 2011 increases and the terms of various side agreements reached with Phoenix.”

In 2017 we received letters from Phoenix that announced there would be an “overall increase to cost of insurance rates, as well as progressive increases…beginning when an insured reaches age 71 through age 85.”  The lawsuit claims that the increases are “unlawful” since any changes must be “on a uniform basis for all insureds in the same class.” According to the lawsuit, the policies “do not have a distinct age 71 to 85 class, nor do they have separate classes for each of age 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, and 85. The 2017 COI Increase therefore violates the contractual uniformity requirement”…since… “policyholders aged 71 and older are being targeted and treated differently than policyholders younger than 71” and “policyholders aged 72 and older are being progressively targeted each year as they age and discriminated against relative to younger policyholders.”

The lawsuit contends the “2017 COI Increase is not based on the enumerated factors” that are mandated in the policies – “mortality, persistency, investment earnings, and expenses.” For example, mortality rates, “have improved steadily each year” and “people are living longer than when the products were process and issued.” Some of the policies subject to the increase “were issued as recently as 2014,” and the suit contends that “nothing that has changed between 2014 and 2017 that would merit a new COI rate increase.” According to the filing, “the increase was not calculated through an actuarially reasonable methodology, and was designed to induce lapses, all in violation of the policies and the implied covenant of good faith and fair dealing.”

The complaint notes that the increase was not implemented in New York state “because Phoenix NY is regulated by the New York Department of Financial Services (“NYDFS”), which has recently become an active regulator in monitoring unlawful COI increases” and contends that “the only possible explanation” was that the carrier “knew that the COI increase was not legally or actuarially justifiable and that NYDFS would find it to be unlawful.” The fact that the carrier exempted New York policyholders from the increase was “another violation of the prohibition against intra-class discrimination.”

While the increase did not occur in New York, the case was filed in New York. The complaint noted that Phoenix was acquired by Nassau Re in 2016 and though it has a statutory home in Connecticut the senior management works out of New York City, the company address is listed there, and “all major decisions, including the decision to raise COI rates on the Subject Policies, are made from Nassau Re’s New York City headquarters.”

The suit asks the court to declare that the 2017 increase was “unlawful” and “constituted a material anticipatory breach of the Subject Policies.” It requests the court order Phoenix to “reinstate any lapsed or surrendered policies” and provide the plaintiffs with “compensatory damages, consequential damages, restitution, disgorgement, and any other relief permitted by law or equity.”

We will be following the court case and will report back as the proceedings unfold.

For a copy of the 28-page lawsuit, please email

New Transamerica Cost of Insurance Increase Is One of the Largest Yet

In the summer of 2017 we posted a blog about another Transamerica cost of insurance (COI) rate increase affecting Ultra 115 and TransSurvivorship products purchased in 1998-99. We anticipated that the increases would be around 58%—a hefty raise. What we are seeing now could easily surpass that.

We are now beginning to receive notices of monthly deduction rate increases for some policies. Some of the policies are hit with a level 47% increase. Others, according to the notices will increase 39% on the next anniversary date, then in addition, the carrier anticipates increasing the COI by that same amount (39%) the next year and the year after. The increases are “compound” and over-and-above the “customary increases associated with age.” After the three-year period the increase percentage remains level.

A three-year compounded annual 39% increase is dramatic, and the carrier admits the increase “may be a significant consideration” for the policyholder, while laying out the typical policy holder options: retaining the current death benefit and paying the higher carrying cost, reducing the death benefit to lower the cost, surrendering the policy for cash value or reaching out to the carrier for other options. In the past we have found that some Transamerica UL contracts do offer a reduced paid up whole life policy for some policy holders.

Transamerica is increasing the rates based on “current expectations” about “future costs,” and though “future costs of providing coverage are subject to change over time,” they believe that “the second and third rate increases specified . . . are necessary.”

What does an increase like that look like? I asked our team in New York City to look at an illustration for one of the policies affected by the increase.

First, an explanation. Carrier COI charges are computed on a per thousand basis on the net amount at risk, defined as the difference between the death benefit and the cash value of the policy. For example, if a level death benefit policy has a benefit of $1 million and a cash value of $200,000, COI is only charged on $800,000 ($1 million minus $200,000). Why? Because if you die, you do not get the cash value—the carrier keeps it, you get the death benefit only. Therefore, their risk is the difference between the two.

Note: Some policies can be designed with an increasing, not level, death benefit, which increases the amount your heirs receive (and the cost of the policy).

Our NYC team provided a cost increase analysis for a policy in our portfolio. As expected, the cost increase in the first year was 39%, from $5.56 perCOI thousand dollars net amount at risk per month to $7.73. Assuming a policy had net amount at risk of $800,000, as above, the pre-COI increase monthly charge in the next year (year 1) would be $4,448 ($5.56 x $800,000 / 1,000). Make sense?

After the COI increase, the monthly charge would be $6,183 ($7.73 x $800,000 / 1,000), the 39% jump.

Skip down to the third year, which assumes the compounded 39% increase each year. The pre-COI monthly charge would have been $5,642, but after three years of compounded increases, the monthly deduction charge rises to $15,161, a 169% increase. In this scenario, the approximate annual carrying cost for the policy go from $67k to $182k.

From the fourth year on the percentage increase remains a level 168.72% over the previous rates. The carrying costs above are not the exact numbers that would occur—they could get worse, if the policy’s cash value drops (and the net amount at risk increases). These are some of the largest cost increases we have seen to date from any carrier.

While we hoped the COI increases would slow down or even stop with interest rates rising, this latest increase tells us that may not be the case.

Special thanks to Frank Tomasello and Mike Irey in our NYC office for their contribution to this posting.  

Shared Characteristics of Long-Term Care and Life Insurance Cost Increases

Sally Wylie, a retiree living on an island in Maine, was stunned when her long-term care (LTC) policy premium almost doubled. According to the Wall Street Journal article that recounted her dilemma, the one-time learning specialist took on part-time work to help with the finances, and she and her husband cut back on expenses to afford the premium for the policy that was purchased to be their safety net (1).

Permanent life insurance has experienced similar, large cost increases. Because of articles we published in the last few years on this subject, we have received more than one hundred emails from consumers stung by the cost of insurance (COI) increase on their life policies. Some people, like Sally and her husband, scrimp in other areas to pay the increased policy costs. Others have simply dropped coverage, which I suspect many long-term care policyholders have also done.

The cost increase dilemma facing life and long-term care policyholders stems from the decade-long, historic low-interest rate environment. Insurance carriers take in premiums, invest them and (hopefully) generate enough Moodysinvestment income to pay out future benefits and still make a profit. The general accounts of most insurers are invested primarily in high-grade corporate bonds. As the chart to the right, which shows the bond yield for Moody’s Seasoned Aaa Corporate Bonds, points out, bond rates have been slipping generally downward for the last 35 years. And since the market crash of ‘08-’09, interest rates have dropped to never-before-seen lows.

John Hancock, the insurer of the federal government’s employee long-term care program, raised premiums dramatically after interest rates that were expected to rise after securing the government contract in 2009 instead dropped by about 33% (2).

Current assumption universal life insurance carriers profit from what is called the interest rate spread. They invest at 6%, credit the policy 4% and keep 2% as “profit.” One carrier, among the first to raise COI rates, was contractually obligated to credit their policies 5.5%, even while their investment earnings were less than 5%. No profit there.

Most LTC and life insurance policies experiencing the cost increase are older policies written in the ‘high’ interest years of the ‘80s and ‘90s, another characteristic these policy increases share. They both impact older aged policy holders who have paid premiums for 20 or 30 years. Many retirees, who have reduced income due to low interest rates in conservative investments, now face higher costs driven by those same low interest rates. And for most older life and LTC policy holders, there is no alternative. They are typically too old or unhealthy to obtain more economical coverage.

Another similarity is that carriers are providing both life and LTC policyholders, as a principal option, the ability to maintain the same premium cost by lowering the benefit that would be paid, reducing carrier liability while still retaining their cash flow. In every life insurance COI increase notice we have received, reduction of death benefit to retain current carrying cost is proposed as a policyholder choice. And LTC carriers are leading with the same benefit-reduction option.

Many policyholders—both LTC and life—are simply abandoning their policies after years of premium payments, potentially risking their retirement security. A recent article in the Wall Street Journal lamented the fact that use of private retirement insurance products is dropping, with the burden being shifted to public plans (3). The needs of a widow whose husband dies without life insurance or a couple incurring large LTC bills without resources will shift to and drain the public system going forward.

As the article pointed out, “retirement security isn’t just about having a nest egg, but…also about having options for turning that saving into security.” For some who have seen the costs of their life insurance and LTC policies rise, some of their retirement security may be slipping away.

While we focus on life insurance, the ITM TwentyFirst University is offering a session on long-term care insurance with expert Kim Natovitz on Tuesday, April 24 at 2 p.m. Eastern Time. The session provides one hour of free continuing education for Certified Financial Planners and Certified Trust and Financial Advisors. To sign up, click here.


  1. “Millions Bought Insurance to Cover Retirement Health Costs. Now They Face an Awful Choice.” Leslie Scism, Wall Street Journal, January 17, 2017.
  2. “Another Big Long-Term Care Insurance Premium Hike.” Howard Gleckman, Forbes Magazine, August 1, 2016.
  3. “Retirement Insurance Products Are Disappearing. And That’s Dangerous.” Benjamin Harris, Wall Street Journal, April 13, 2018.