An ailing mother calls her life insurance company; she can no longer afford the $100/month premiums on her 20-year-old $50,000 permanent life policy. Her statistical life expectancy is 14 years – the math is $100 x 12 months x 14 years or $16,800 of payments still to be made. If she cancels the policy, she gets nothing. Can she sell the policy to a third party, receive much-needed cash now and no longer have to pay the premiums?
The Canadian Life and Health Insurance Association (CLHIA) is lobbying not to allow this in Ontario, forever. They argue it will expose senior policyholders to financial abuse. If someone could offer a few thousand to the ailing mother, she may take it but the new owner would have an interest in her death. This is known as a viatical settlement.
A viatical settlement is when the insured sells their policy to a third party for more than the cash surrender value but less than the death benefit. It gives the person in need money now. The new policyholder pays the monthly premiums and receives the full benefit upon the death of the insured person.
The people arguing for a viatical settlement say it provides an option to those who need the immediate assistance given their financial circumstances. It also often pays more than the cash surrender value, and it’s better than letting a policy lapse; where insurers profit the most.
Viatical settlements surged in popularity in the United States during the AIDS epidemic in the 80’s. Young, gay men, diagnosed with AIDS and without typical beneficiaries, had short lifespans and were looking to extract any money they could while they were alive. Investors saw an opportunity to make some money to everyone’s benefit; fronting them cash now, and collecting on their investment upon their death.
In Canada, four provinces do not explicitly prohibit the sale of life insurance policies to third parties: Saskatchewan, Quebec, Nova Scotia and New Brunswick. All other provinces, including Ontario, strictly forbid it. It’s a contentious issue.
Right now, there are two ways to help our ailing mother.
Compassionate Assistance and life insurance
The industry’s response to the contention is for the insurance company to offer a loan against the future payout of the death benefit and it’s only once the insured qualifies as terminally ill. While most Canadian life insurers offer it as part of the policy, it may be worth getting new life insurance quotes from a few providers if they don’t. Often, a life insurance payout is to help pay off debts, final expenses, and some extra to help the beneficiaries move on.
Compassionate assistance it a tool to help those suffering ease the financial burden of dying however they want – flights around the world, special gifts to caregivers, even hotel rooms for family to be at the bedside of the terminal patient.
In the Ontario Insurance Act, the owner of the policy must have an insurable interest in the life insured. Someone with insurable interest can take over the policy, pay the premiums, and be named the beneficiary. Who can own a life insurance policy with insurable interest? A child, grandchild, a spouse, or anyone relying on the insured for mental or financial support. Again, in this case, perhaps the son of our ailing mother can take over the premium payments.
Bill 162 is an attempt to change the Ontario Insurance Act to allow for viatical settlements to be able to sell your life insurance policy to a third party without an insurable interest. It passed the second reading in the house of commons at the end of 2017, and there are still a few stages to pass before it becomes law.
How do you feel about the bill? What options would you want to have for your ailing parent? What options would you want to have for yourself?
Photo by Elien Dumon on Unsplash