If you’ve done any reading about life insurance, you’ll come across the term life settlements, or viatic settlements. While they aren’t exactly the same thing, they both refer to the same type of transaction, which is selling a life insurance policy. So can you you sell a life insurance policy in Canada? As with most things, it depends.
What is a life settlement?
A life settlement, or viatical settlement, is when an insured person sells their policy to a third party, generally for more than the cash surrender value but less than the death benefit. It lets a policy holder receive a lump sum immedately, at the expense of their policy. The new policyholder pays the monthly premiums and receives the full benefit upon the death of the insured person.
Here’s an example: Margaret is in her 70’s, and money is becoming a problem. She can no longer afford the $100 monthly premiums on her $50,000 permanent life insurance policy. Her statistical life expectancy is 14 years – multiply that by her annual premiums and she has $16,800 of payments still to be made. If she cancels the policy she forfeits the premiums already paid, and her beneficiary won’t receive her death benefit. She’ll receive her cash surrendender value, but it will be very small compared to the death benefit.
A life settlement policy lets Margaret sell the policy to a third party, receive some much-needed cash, and frees her from future premiums. In order to make money, the third-party would offer less than the death benefit minus the expected cost of future premiums – something like $5,000-$15,000.
Selling a life insurance policy is different to transferring a life insurance policy. It’s often okay to change the policy holder, but not the life insured, of a life insurance policy, as long as the new policy holder has an insurable interest in the life insured. For individuals, this generally means a family member.
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Can you sell a life insurance policy in Canada?
It’s complicated. Life settlements, where a policy holder sells their personal life insurance policy to a third-party, is legal in Quebec, New Brunswick, Nova Scotia, and Saskatchewan. There have been attempts to legalize selling life insurance policies in Ontario as well, but is has met resistance. It’s worth noting that some major life insurance companies, such as Sunlife Insurance, never allow life settlments, no matter what province you’re in.
The problem with selling life insurance
Recent attempts have been made to allow life settlements in all provinces. This most recently happened in Ontario, with an attempt to amend the Insurance Act in 2017. The Canadian Life and Health Insurance Association (CLHIA) lobbied hard against this, arguing it would expose senior policyholders to financial abuse. In our example, someone could offer a few thousand dollars to Margaret, and she may take it, thinking she has no other choice.
Those who support viatical settlement say it provides an option to those who need immediate assistance, given their financial circumstances. It generally pays more than any cash surrender value that might exist, and it’s better than letting a policy lapse. This wouldn’t be ideal for life insurance companies, as policy lapses are a source of profit for them.
Canada vs. the USA
The idea of selling life insurance policies is an import from the United States. Life settlements surged in popularity in the US during the AIDS epidemic in the 1980’s. Young, gay men, diagnosed with AIDS and without beneficiaries, had suddenly shortened lifespans. Understandably, they hoped to get as much out of the could from the years they had left. Investors saw an opportunity to make some quick money; fronting them cash now, and collecting on that investment upon their death.
Opponents to life settlements cite the more advanced life settlement market in the US, where there is a track record of financial abuse. They argue that this has become fundamental to the settlements industry.
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Alternatives to selling a life insurance policy
Let’s return to our example, to explain what other options are available. Assuming Margaret lives in a province like Ontario, where life settlments are illegal, she has two ways to ease her financial burden.
Transfer her life insurance policy
While it’s illegal to sell a life insurance policy to a third party, it is often legal to change the policy holder, without changing the beneficiary. The new owner will need insurable interest in the life insured. To have insurable interest, you would would need to expect a financial loss in the case that the life insured (eg Margaret) were to pass away. In Ontario, this is covered under the Ontario Insurance Act.
If Margaret has someone in her life with insurable interest, they can take over the policy, pay the premiums, and be named the beneficiary. That takes the burden of paying her premiums off her, while retaining the full value of the death benefit. In most cases, this kind of policy would be transferred to a child, grandchild, or other relative. Note that there can be major tax implications from this transaction, so be sure to speak to a tax lawyer.
Compassionate assistance and policy loans
The industry’s response to the contention around life settlements has been to make it easier to access some of the death benefit ahead of time. One way this is done is through policy loans. A policy loan sees a policy holder borrow money from their insurer, using the cash surrender value of their policy as collateral. Interest will be charged, which can either be paid while the policy holder is alive, or added to the cost of the loan. When the life insured dies, their death benefit will have the outstanding balance deducted from it.
There are a couple of caveats to consider. A policy holder can only borrow up to the value of their cash surrender value, or more commonly a given percentage of it (eg 80%). Beyond that, they risk letting their policy lapse. A policy loan also doesn’t mean you don’t need to pay premiums. Finally, policy loans are only available on permenant life insurance polices – guaranteed and term policies don’t have a cash surrender value to borrow against.
Another option most life insurance companies offer is a compassionate payment. This is where an insurer pays a portion of the death benefit before the life insured passes away, in the case of the insured becoming terminally ill. It typically requires a diagnoses of less than two years to live. 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.
Remember that a compassionate payment will reduce the size of your death benefit, as it’s just an early payment of this value. However, this means compassionate payments are not taxed, which is a plus. You’ll still be required to pay premiums on your policy.
The bottom line
Selling a life insurance policy is only legal in four Canadian provinces, and with the weight of the industry against change, it’s unlikely to become easier in the future. The best thing you can do is to prepare for your own old age. A combination of the right life insurance cover, along with diligent deposits into the right RRSP while you’re working, will help stop you from getting into the desparate position of considering a life settlement.
If you’re already in that position, get in touch with family and see if they can help. It’s may also be worth considering new coverage. While most Canadian life insurers offer policy loans and compassionate assistance for eligible policies automatically, it may be worth getting new life insurance quotes from a few providers if yours doesn’t. Even senior citizens can be eligible for affordable coverage.
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