Universal life policies can’t be used for unlimited deposits, appeal court rules

The Saskatchewan Court of Appeal has upheld a lower court ruling that found universal life insurance policies can’t be used for unlimited deposits.

In March 2019, the Court of Queen’s Bench of Saskatchewan denied an application from several hedge funds that sought to make unlimited deposits in universal life products created in the 1990s, before the province clarified in 2018 that life insurers can’t accept deposits.

The hedge funds — including Ituna Investments LP, which sought to make unlimited deposits in Industrial Alliance policies, and Mosten Investment LP, which sought to do the same with Manulife policies — argued they should be allowed to make unlimited deposits for a guaranteed rate of return.

A ruling in favour of the hedge funds would have had devastating consequences for the insurers — short-seller Muddy Waters Research suggested a decision in favour of Mosten would “financially cripple” Manulife. But the hedge funds were unsuccessful, with the court ruling that deposits must relate only to paying life insurance premiums.

Rating agency DBRS. Ltd. noted that the 2019 decision in favour of the insurers “materially [reduced] risks arising from the extreme interpretation of some insurance contracts in Canada.” Insurers were quick to applaud the appeal court’s affirmation of that decision.

In a statement, Industrial Alliance Insurance and Financial Services Inc. said it has “always maintained that the position taken by Ituna was legally unfounded and that life insurance contracts were never intended to be used as deposit accounts and for purposes unrelated to life insurance.”

Manulife Financial Corp. also welcomed the decision, saying it was “pleased” with the court of appeal ruling.

“The decision confirms that policyholders cannot make unlimited deposits into universal life insurance contracts and makes clear deposits must relate to amounts required to pay the life insurance premium,” a statement from Manulife read.