Learn more about the Universal Life Scam:
In 1966, the Carter Report made a series of recommendations in overhauling the Income Tax Act including changes to the taxation of life insurance. The main recommendation pertaining life insurance policies was:
“3) In general, investment income accumulated for the benefit of the policy holder should be included in the policy holder’s income in the year it is accumulated in the hands of the insurer.” Source: Bill Strain 1995 paper “The Taxation of Life Insurance
The picture below represents the proposed taxation of life insurance
But the Carter Commission recognized the difficulty of proceeding with the proposed structure. Instead it recommended:
“As an alternative, the commission proposed a system of withholding taxes under which the insurer would pay tax on investment income credited to policy reserves when accrued; the policy holder would receive a credit at the time benefits were paid (the blueprint for the investment income tax).” Source: Bill Strain 1995 Taxation of life insurance
But this was rejected by Finance Minister Benson in 1969:
“Carter’s recommendation to tax income credited to policy reserves in the hands of policy holders on an accrual basis was rejected.” Source: Bill Strain 1995 Taxation of life insurance
In March 1977, the proposed budget presented by the Federal Government wanted to make life insurance policies subject to accrual taxation:
“The second change…, was to tax the investment gain implicit in a life insurance policy upon the death of the insured in the same manner as it was taxed upon the surrender or maturity of the policy.” Source: Bill Strain 1995 Taxation of life insurance
The lobbying of the insurance industry went on the attack by using terms such as widow and orphan tax. This lobbying was very effective even repealing some the changes that Benson had done in 1969.
It is in 1989 that the IIT was resurrected with the Federal government justifying its position through this statement:
“The current exemption from tax of investment income built up in life insurance policy reserves creates a bias in favor of insurance. The new tax will ensure that the investment income accumulating over the years in the policy reserves of life insurance companies bears a reasonable level of tax.”
The final tax structure adopted was
When you read the history and the final adopted structured adopted by the Federal Government we can only conclude that:
1) The accumulating income (reserve) on exempt policies is indeed subject to taxation.
And you can ask:
2) Is the mechanism employed by insurer to pay for the IIT make cash values of exempt policies subject to taxation?
3) Insurance companies market and promote these policies as being tax sheltered. Is this a fraudulent misrepresentation? Is this a breach a contract?
4) How many level of taxation exist on a life insurance policy. I will demonstrate that $1 dollar invested into a Universal Life policy can be taxed 4 times…Quadruple taxation…
We will make the case that both answers are positive in our legal claim against Manulife.
The last slide below shows how one of the unique product introduced by Maritime Life called Life Accumulator. This product, on surrender of the policy, gave the IIT refund back to policyowner therefore erasing double taxation
Finally you should reflect on an interesting statement in this entire affair made in the 80s:
“The House of Commons Finance Committee observed that “most policyholders who purchase exempt policies are not in a net gain position until between 8 and 13 years after the policies are issued in the case of a whole-life policy.”
With Universal Life policies invested in equity still not in a net gain position after 15 years, what does this means for the policy holder?