Exploiting a Loophole in a Universal Life Insurance Contract


The Wall Street Journal reported on a Canadian farmer that took advantage of high interest rates on universal life insurance side accounts.  Through eight different universal life insurance policies that were originally issued in the 1990’s, he was able to prepay insurance premiums into a side account that offered yields of up to 5%.  The returns were guaranteed by the insurance companies.  While most investors would have invested just small amounts this way, the farmer took advantage of the lack of a limit in the contract to invest over $11 million of his own money, friends’ money, and even money from hedge funds.  He presumably was given a split of the outsider’s interest in exchange for access to this money-making investment.

Keep in mind that for much of the the last 10 years, interest rates have been extremely low.  Bank of Montreal sold one of the universal life insurance policies; parking your money in a Bank of Montreal bank account would have yielded someone closer to 0%.  One thing to note is that these are not policies on himself or a spouse; he bought the policies from other people who had bought them in the 1990’s.  Only 4 out 10 provinces in Canada  even allow that type of purchase and it sounds like no one else was really doing it.  No marketplace existed so he had to network with financial advisors and other in order to find policies to buy.

He was probably one of the few people that actually read the contract and discovered that this type of investment was possible (“think outside the box”).  On top of that, he was willing to bring in outside investors like hedge funds and friends to improve his returns.  This investment is now being litigated in court as the insurance companies are saying that he is using the ULI side accounts in a way that was never intended.  He doesn’t have to spend his own money for this either as he has found other investors to fund his legal costs in exchange for access to the side accounts.

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