Can you sell your life insurance policy in Canada for a lump sum payment? The short answer is yes – but there are substantial legal considerations and implications to understand.
Selling a life insurance policy, or a life settlement, can provide much-needed financial relief for Canadians facing cash flow challenges, mounting medical bills, or other unexpected expenses. However, regulations vary by province, and the process requires careful evaluation to ensure it aligns with your needs and goals.
This article explores the ins and outs of selling life insurance policies in Canada, including eligibility criteria, the step-by-step process, factors influencing settlement value, alternatives to consider, and potential tax implications. By the end, you’ll clearly understand whether a life settlement is right for your unique situation.
What is a Life Settlement?
Selling a life insurance policy often referred to as a life settlement or viatical settlement, involves transferring ownership of an existing policy to a third party. This transaction provides the seller with a lump-sum payment while the buyer assumes responsibility for future premium payments and receives the death benefit upon the insured’s passing. This differs from surrendering a policy, where the policyholder cancels the coverage with the insurance company and receives its cash surrender value, which is typically lower than the payout from a life settlement.
Can You Legally Sell Your Life Insurance Policy in Canada?
The legality of life settlements in Canada varies by province, with some provinces allowing them, others banning them, and some in a state of regulatory limbo. Life settlements are legal and regulated in Quebec and Saskatchewan. Nova Scotia and New Brunswick allowed life settlements until regulatory changes in 2020.
Most other provinces, including Ontario, Alberta, British Columbia, Manitoba, and Prince Edward Island, do not currently allow life settlements. In Ontario, for example, Bill 162 was proposed in 2017 to amend the Insurance Act and regulate life settlements, but it faced opposition from the insurance industry and was not passed.
It’s important to note that even in provinces where life settlements are legal, some insurers, such as Assumption Life Insurance, Sun Life insurance prohibit policyholders from selling their policies as part of the contract terms.
Why Do People Sell Their Life Insurance Policies?
There are 4 reasons why someone might choose to sell their life insurance policy, including:
- Financial Hardship: The need for immediate cash to cover medical expenses, debt, or other emergencies can make selling a policy an attractive option.
- Unaffordable Premiums: As individuals age, premiums can become increasingly burdensome, especially for fixed-income individuals.
- Changing Needs: If beneficiaries are financially secure or the policyholder’s financial situation improves, the need for life insurance may diminish.
- Investment Opportunities: The lump-sum payment from a life settlement can be reinvested, potentially yielding higher returns.
The decision to sell a life insurance policy is a personal one that depends on individual circumstances and priorities. Policyholders must carefully consider their options and seek guidance from financial professionals before pursuing a life settlement
Why Do Life Insurance Companies Oppose Life Settlements?
The Canadian Life and Health Insurance Association (CLHIA), which represents 99% of Canada’s life and health insurance companies, has actively lobbied against allowing life settlements. They argue that life settlements:
- Reduce profitability: When policies lapse or are surrendered, insurers don’t have to pay out the full death benefit, which boosts their profits. Life settlements reduce lapse rates and increase payouts.
- Raise concerns about elder financial abuse: The CLHIA argues that life settlements could expose vulnerable seniors to economic exploitation by unscrupulous investors who pressure them to sell policies for less than fair value.
Supporters of life settlements counter that with proper regulation, the industry can provide policyholders with much-needed financial options while safeguarding against abuse.
Who is Eligible to Sell Their Life Insurance Policy?
Not everyone can sell their life insurance policy. Typical eligibility requirements include:
- Policy Type: Whole life insurance, universal life insurance, and convertible term policies are most commonly eligible for life settlements. Group policies and non-convertible term policies are evaluated on a case-by-case basis.
- Policy Size: To attract investors, the death benefit should be substantial, usually $100,000 or more.
- Policyholder Age: Sellers are typically over 65, as investors are looking for policies with shorter life expectancies.
- Health Status: A decline in the insured’s health since the policy was issued can increase the settlement value, but a change in health is not strictly required.
Each life settlement provider may have slightly different criteria, so it’s essential to check with a licensed provider in your province for specific requirements.
How to Sell Your Life Insurance Policy: A Step-by-Step Guide
If you’ve determined that you are eligible and interested in selling your life insurance policy, follow 6 steps:
Step 1: Find a Licensed Life Settlement Provider or Broker
Research life settlement companies or brokers licensed to operate in your province. You can contact your provincial insurance regulator to verify a provider’s license and check for any disciplinary actions.
Step 2: Provide Policy and Health Information for Evaluation
You’ll need to share details about your life insurance policy, such as the type, face value, cash value life insurance, and premium payment schedule. The provider will also request authorization to access your medical records to estimate your life expectancy.
Step 3: Wait for the Underwriting Process
The life settlement provider will thoroughly evaluate your policy and health status to determine an appropriate offer price. This process can take several weeks.
Step 4: Review and Compare Offers
Once the underwriting is complete, the provider will present you with an offer. Review all terms carefully and consider seeking legal or financial advice. If you’re working with a broker, they may present offers from multiple providers for comparison.
Step 5: Complete the Sale and Transfer Ownership
If you accept an offer, you’ll sign a contract transferring ownership of the policy to the life settlement provider. You’ll receive the agreed-upon lump sum payment, and the provider will take over future premium payments. Your insurance company will be notified of the ownership change.
5 Factors Affecting Your Policy’s Settlement Value
5 key factors determine how much you can expect to receive from a life settlement:
Face Value and Cash Value of the Policy
Generally, the higher the death benefit and cash value, the more you can expect to receive. Investors want a return on their investment, so a more extensive policy provides more potential profit.
Premiums and Cost of Insurance
High premiums relative to the death benefit will lower the settlement value, as the investor will need to pay more to maintain the policy.
Policyholder’s Life Expectancy
A shorter life expectancy typically results in a higher settlement offer, as the investor must pay premiums for a shorter period before receiving the death benefit.
Type of Policy
Some policies, such as universal life with flexible premiums, may be more attractive to investors and command higher settlements.
Current Market Conditions
Interest rates, investor demand, and regulatory changes can all impact life settlement offers.
A life settlement provider will weigh all these factors using actuarial and investment models to determine a fair offer price. Remember that while a life settlement will provide more than the policy’s cash surrender value, it will be less than the full death benefit.
What are the Cons of Selling Your Life Insurance Policy?
As with any significant financial decision, selling your life insurance policy has 4 disadvantages.
- Beneficiaries Lose Death Benefit: When you sell your policy, your designated beneficiaries will no longer receive the death benefit payout upon your passing. This could impact their long-term financial security.
- Taxable Income: As mentioned earlier, life settlement proceeds are treated as taxable income, which could push you into a higher tax bracket and impact eligibility for certain government benefits.
- Less than Full Death Benefit: While a life settlement offers more than the cash surrender value, it will be less than the complete death benefit your beneficiaries would have received.
- Reduced Privacy: The life settlement process requires sharing personal and medical information with third parties, which may concern some individuals.
What Are Some Alternatives to Selling Your Life Insurance?
If you need to access funds from your life insurance policy but either don’t qualify for a life settlement or live in a province where settlements are not allowed, consider these alternatives:
- Policy Loan: Borrowing against the cash value of a permanent life insurance policy provides access to funds without selling the policy.
- Compassionate Payment: Individuals with a terminal illness may qualify for a compassionate payment, receiving a portion of the death benefit early.
- Transfer Ownership: Transferring ownership to a family member with an insurable interest can maintain the policy’s benefits within the family.
- Reduce Coverage: Decreasing the death benefit can lower premium payments, making the policy more affordable.
- Surrender the Policy: Surrendering the policy to the insurance company provides the cash surrender value, although this is typically less than the amount received from a life settlement.
- Cancel the Policy: As a last resort, cancelling the policy terminates coverage and forfeits any accumulated cash value.
Making an Informed Decision
Selling your life insurance policy is a significant financial decision with long-term implications for you and your loved ones. By understanding the eligibility criteria, legal considerations, and potential alternatives, you can make an informed choice that aligns with your unique needs and goals.
If you’re considering a life settlement in Canada, consult with licensed providers, financial advisors, and tax professionals to evaluate your policy and explore your options. With the proper guidance and careful consideration, a life settlement can provide much-needed financial relief and peace of mind during challenging times.
FAQs to Selling Your Life Insurance Policy
Is selling a life insurance policy taxable in Canada?
Yes, proceeds from selling a life insurance policy (life settlement) are considered taxable income in Canada. The taxable portion is the difference between the settlement amount and the policy's adjusted cost basis (total premiums paid minus any dividends or distributions received). Consult a tax professional to understand the full tax implications.
Can I sell a term life insurance policy in Canada?
In most cases, you can only sell a term life insurance policy in Canada if it is convertible to a permanent policy. However, if you have a terminal illness, even a non-convertible term policy may qualify for a virtual settlement.
Do I qualify to sell my life insurance policy?
To qualify for a life settlement, you typically need to be over 65 years old and have a life insurance policy with a face value of at least $100,000. While a decline in health since the policy was issued can increase the settlement value, it is not strictly required. Each life settlement provider may have slightly different eligibility criteria.
How much can I get for selling my life insurance policy?
The amount you can receive from a life settlement depends on various factors, such as the policy's face value, cash value, premiums, age and health, and current market conditions. Generally, life settlements offer 20-30% of the policy's face value, which is more than the cash surrender value but less than the full death benefit.
Can you sell your life insurance policy for cash in Canada?
Yes, selling your life insurance policy for cash in Canada through a life settlement or a virtual settlement is possible. However, the legality and availability of this option vary by province.
Currently, life settlements are legally allowed and regulated in Quebec and Saskatchewan. In contrast, provinces like Nova Scotia and New Brunswick have banned them until proper regulations are put in place. Most other provinces, such as Ontario, Alberta, and British Columbia, do not allow them.
Can I change my mind after selling my life insurance policy?
Most provinces have a rescission period, typically 10-30 days after signing the life settlement contract, during which you can cancel the transaction and restore your policy ownership. Be sure to check the specific rescission terms in your contract.
What happens if I decide not to accept a life settlement offer?
You are not obligated to accept an offer, even after going through the underwriting and valuation process. If you decline an offer, your policy remains in force with you as the owner, and you can continue to pay premiums as before.
Is there a minimum policy size for a life settlement?
Most life settlement providers have a minimum death benefit requirement of $100,000. Policies with smaller face values may not provide sufficient return on investment for buyers.
How long does the life settlement process take?
The timeline varies based on the complexity of the case and the responsiveness of all parties involved. On average, expect the process to take 3-4 months from initial application to receiving funds.
Can I sell my term life insurance policy?
In most cases, term life insurance policies are only eligible for a life settlement if they are convertible to permanent policies. However, if the policyholder has a terminal illness, even a non-convertible term policy may qualify for a virtual settlement.
