Life Insurance Settlement Are Illegal in Canada
You Might Have Heard of Life Insurance Settlements
Life Insurance Settlements: Trading on your life insurance policy before you die
The life insurance death benefit refer to the amount of money your beneficiary receives after you die and is very different from life insurance settlements. The life insurance company pays the death benefit based on the amount of life insurance you originally purchase plus additional life insurance acquired through dividends on whole life policies or the investment fund value inside a universal life policy. A life insurance death benefit can only be paid out after your death, however life insurance settlements are a way of cashing in your life insurance to a third party before you die.
The practice of trading in life insurance is illegal in most provinces of Canada. According to Section 115 of the Insurance Act only life insurance companies are permited to trade in life insurance policies (this is the practice of reinsurance, where large pools of Canadian risk – many insured lives – are sold to international reinsurance companies that aggregate risk across the globe). A third party company in Canada cannot buy a life insurance policy from a person and become the owner of the policy and the beneficiary.
Things are different in the US. In many states the practice of trading on life insurance policies is legal and a secondary market for life insurance policies has been created. The arguement is that many people would benefit from having a secondary market to sell their unwanted life insurance policies and realize a reurn on their invested premiums while they are still alive.
Why are Life Insurance Settlements illegal in Canada?
The Canadian government prohibited trading on life insurance policies back during the Great Depression, when financially destitute people were selling their life insurance policies for much needed immediate cash. This created a predatory market for life insurance policies from people that have fallen on hard times. The same precedent is true today, where many people can fall on hard times and they might want to cash in their life insurance to get the cash value out of the policy or be able to sell the policy for more than the insurance company is offering in cash value. The question remains: is this a good thing? Is it in the interest of the client to have a third party company to sell the life insurance contract too?
The answer is a resounding NO. If it was in the clients best interest to sell their policy then they would be receiving full value for that policy and there would be no room for profit on behalf of the life insurance settlements company buying said policy. In order for this secondary market for life insurance policies to work the company buying the policy MUST underpay the owner of the policy for the contract in order to make a profit on it.
Policy owners typically sell their life insurance policy for 12 – 15% of the death benefit of the policy as a life insurance settlement. This means that if they had a whole life insurance policy with a death benefit of $100,000 they would be able to sell it for $12,000 – $15,000. The life insurance settlement company buying the policy become the owner of the policy, agrees to pay all future premiums and is the beneficiary.
Do you want a corporation having a vested interest in your death?
The corporation who then owns the life insurance contract will incur costs to hold onto that policy until the person eventually dies. Upon death, the tax free death benefit is paid to the life insurance settlements company and they can realize a profit.
This means the life insurance settlements company needs to keep track of the life insured (the person who sold the policy) until they die. They are following your whereabouts and waiting for your death. Not a pleasant thought – a soulless corporation waiting (often impatiently) to profit from your death.
The Viatical or Life Insurance Settlements industry is not guaranteed and has had considerable problems
In Canada there are a number of companies acting as alternative investment firms raising capital to invest in the US Life Insurance Settlements industry. Many of these companies have had serious setbacks. The first problem arose in the 1980s and 90s when life insurance policies on terminally ill AIDS patients were purchased with the expectation that the AIDS patients would die in a few short years. Then medical advances created new AIDS and HIV medications that could extend life of AIDS patients for decades. The Viatical companies lost millions and many went bankrupt.
In today’s Life Insurance Settlements market (the new name for Viaticals, since the old name had to many bankruptcies associated with it) there is little to no regulation of the investment programs being offered. Returns are usually advertised as high as 18% annual compound return, but nothing is guaranteed. There is also the problem of liquidity. An investment with a Life Insurance Settlements company is usually not cashable for a minimum of 5 years, and at that time the life settlement company would need to have liquidity to honour the investment redemptions or they could refuse to pay.
If you are thinking in investing in life insurance settlements company raising capital in Canada to buy US life insurance policies, be extra careful. Medical advances continue to improve life expectancy and people are living longer and longer. The risk is that these companies are sitting on too many costly life insurance policies and the people are not dying. The life insurance settlement company would need to either raise more money to stay in the waiting game or go bankrupt. either way your investment is at risk.
Canadian Life Insurance Companies Offer Compassionate Benefits
Another reason the life insurance settlements business should remain illegal in Canada is that most Canadian life insurance companies would extend a compassionate benefit to a terminally ill patient with life insurance. A compassionate benefit is an early payment of a portion of the life insurance death benefit (up to 50%) to a terminally ill policy owner while they are still alive.
The early payout – the compassionate benefit – is given in the form of a loan, usually at prime plus 1 or 2%. This loan is repaid to the insurance company upon the death of the insured person and the remaining death benefit is paid out to beneficiaries. So, the one main reason people sell life insurance policies for cash – because they are terminally ill and need the cash – is nullified by the insurance company’s compassionate benefit program. The insured person would realize 100% of the death benefit they bought minus a small interest charge. And up to 50% of that death benefit can be used while they are still alive.
At Life Guard Insurance we believe your life insurance is for your estate and beneficiaries
The life insurance settlements market is basically illegal in Canada, the investment companies are unregulated with a poor track record, and the whole industry seems to pray on the weak and needy. At Life Guard Insurance we believe in selling life insurance to protect families, solve estate issues, create a legacy for the next generation. We believe in creating excellent rates of return on life-long investments into life insurance that can ultimately pay you back more than you can ever get from a third party trading on your life. Contact us to find out more about personal risk protection or the problems with life insurance settlements in Canada.
Special Addition – 21 Dec 2011
The province of Saskatchewan does allow trading in life insurance policies because they never enacted legaslation to their provincial Insurance Act prohibiting the activity. However, they do warn both consumers and life insurance brokers or agents to be wary of selling these products. The warning goes so far as to say that an life insurance agent who has a complaint logged against them for encouraging the sale of a life insurance company to a life insurance settlements company will face misconduct hearings unless ALL prudent efforts have been made to ensure the sale of the life insurance contract was in the client’s best interests. So, the liability for making a referral to a life insurance settlements company rest on the shoulders of the life insurance broker/agent, not the client.
Here is the Life Insurance Council of Saskatchewan information bulletin on the subject.
Also see the Securities and Exchange Commission’s views on Life Insurance Settlements in the US.
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Other than Saskatchewan, which are the other 3 Canadian Provinces that permit life settlements? Thanks.
Hi Paul,
Besides Saskatchewan, Quebec, Nova Scotia and New Brunswick allow trafficking in life insurance policies, but there are rules around the practice. The industry never took off in Quebec, and Nova Scotia requires the company trading in insurance policies to have an office in the province, and is regulated by the securities industry. Most other provinces don’t have much regulation around trafficking in life insurance policies and it is part of the exempt market. I will share this slide presentation from Daniel Kahan which explains most of the regulations around trading in life insurance across Canada.
http://www.slideshare.net/dankahan/canadian-life-settlement-market-sep-11
hope this helps answer some questions.
Thanks,
Mitch Reynolds
Hello Mr. Reynolds,
The life insurance settlement in the USA has been legal for 100 years.
I am not sure how long it has been legal in some of the provinces in Canada.
Buying a life insurance policy is like having an asset,you make payments just as you do for your car or a house. The difference between your home or car and a life insurance settlement is you do not enjoy the proceeds while you are living. Now imagine, you need extra cash today, not uncommon these days, you can sell your car, your home, try to take a loan from the bank,(speaking off fraud and ponzi scams) but you can sell your car only to the car manufacture or sell your house only to the builder.Obviously you will want the best price.It is the same with your life insurance policy.
I agree with you,selling your policy is not for everyone.but definitely for those who do not need the coverage anymore or can not make the payments. I disagree with your point that life insurance settlements should be Illegal in Canada.
Life insurance settlements have been legal for 100 years but have only been an industry since the 1980′s, and like any young industry, needs structure and regulations.The good news is there are products that are coming to market that will address these issues.
Hi Dov,
There is one fundamental assumption you make in your comment that I do not agree with – and that is life insurance is like any other asset that can be purchased and traded. Its not. No other asset, like a car, home, stock, bond, etc. requires medical qualification to purchase the policy. No other asset goes through medical underwriting to be approved, offered substandard or even denied. If life insurance was purely a cash transaction commodity, then sure it should be sold on the secondary market as it has value and can be reacquired by the insured whenever they need it.
But an insured person can’t easily reacquire life insurance once they are older and have developed health conditions. And these are the people who are selling their life insurance to for needed cash. And why did they buy life insurance in the first place? Most people buy life insurance for financial risk protection, estate preservation and creating a legacy for the next generation. All these goals are fulfilled to their maximum financial benefit when the life insurance death benefit is paid out. If the life insurance is sold, the original purpose of the contract is undermined and the full economic benefit of the policy is lost to the life settlement company. Not what the person intended when they bought the plan.
There are any number of alternatives to selling your life insurance policy to a life settlement company. People should explore their options before tossing out their life insurance policy they have put so much money into over the years.
That is my opinion, and I still think life settlements should remain illegal in Canada until the industry is properly regulated for the benefit of policyholders (not life settlement companies that pray on those policyholders).
Sincerely,
Mitch Reynolds
Mitch, I think you meant prey rather than pray in your comment (not life settlement companies that pray on those policyholders) although I expect they may also have an incentive to pray for their early demise.I agree that in an ideal world everyone should retain their life insurance policy until they die as a great tax-free (hopefully long-term) investment (as per the Deloitte Study in the US).But the reality is that we are now in a recession and not everyone can afford to do so. If the only alternative is walking away from their T100 policy and letting it lapse,don’t you think a third party investor who offers some cash up front or a share of the death benefit at the back end is helping the policyholder?? I agree with you that a “reverse mortgage” loan would be far more consumer friendly, but do you know a credit union who would offer such a loan?? I have been looking for one for many years and have yet to find one. If the life settlement industry would start offering loans at a reasonable interest rate, that would be a great step forward and there would be no need for them to pray except to make sure that the life insurer will be around to pay the claim when the time comes.
Yes I meant Prey – looked odd when I wrote it. Anyway, maybe there is change in the wind, with most major banks getting into the life insurance business there could be a greater understanding amoung bankers of the value of a life insurance policy and offer loans for collaterally assigned policies. T100 does pose a problem since there is no cash value, and your service of valuating these policies is important if Canadians are to be given better options that outright giving up ownership of their life insurance.
Yes – in the one instance you pose it would be better to get something rather than walk away and lose everything. But, Daniel, if this was the ONLY type of transaction the Life Settlements business engaged in there would be very few policies being transferred over, and the market would be very small. I still think that a large portion of this business comes from Life Settlements “agents” who “prey” on elderly people to get them to give over ownership of their policy for $0.12 – $0.15 on the dollar. Prove to me this isn’t happening and our most vulnerable people in society are not being coerced into selling their policies and I might think the business model is valid.
Cheers,
Mitch Reynolds
Mitch,I don’t know exactly what the situation is in the US where most of the action has been in buying policies with over $1 m. in face from HNW individuals and the guys on Wall St. are definitely not interested in the smaller policies. But why don’t you visit http://www.lifecarefunding.com and consider whether their model would be an efficient alternative to getting your clients to buy expensive LTCi policies in their 50s when they could be buying much more T100 coverage and have the option to use it to pay for their LTC coverage when they need it in their 80s. Maybe you and the insurers would prefer to sell this new type of coverage but what is really in the best interest of the policyholder??
Hi Daniel,
Thanks for the info about T100 as an alternative to LTC Insurance. Seems like a good idea. If you could buy one product that could be used for either a death benefit (life insurance) or a long term care benefit (LTCI) then you might have a winning combination that would let LTC sales in Canada break through the glass ceiling they seem to have hit. I can see you are very specialized in the industry, as an actuarial consultant, and can find non-traditional solutions for people. The vast majority of Canadians don’t have access to people like you (an can’t afford them as I assume you work mainly on larger insurance cases worth hundreds of thousands if not millions of dollars). Your concept has merit. Do you think there is an appetite among Canadian insurers to transform such a concept into an off the shelf product?
Thanks for the valuable info.
Mitch Reynolds
Mitch, thanks for the quick reply and yes I WAS in 2008 a Director of MaxLife Fund a Wyoming company which traded publicly for over 3 years on the OTC BB and reported regularly every quarter to the SEC with independently audited financial statements. This is in complete contrast to New Life Capital in Toronto and Focused Money in Calgary where Canadian life settlement investors got ripped off by unscrupulous promoters who ran off with their money.
In the terminal case I mentioned above I did NOT buy the policy but gave the policyholder an additional $200K third party loan AFTER I first lobbied the insurer to be more flexible and lend them up to $500K on their $1 m. life policy (as per the OIC Guidelines issued by Ontario in 1993).
I agree with you that both Canadian life settlement investors and policyholders should be protected. That was the intent of the draft Viatical Settlement Regulations issued by FSCO in July 2001 in response to Schedule G of the Red Tape Reduction Act 2000 which repealed sec. 115 of the Ontario Insurance Act subject to FSCO promulgating regs. As Jim Flaherty was the Ontario Finance Minister at the time it would be great if the Feds would now take the initiative and regulate the industry across Canada rather than on a province by province basis.
The now publicly-traded life insurers do not want a regulated secondary market for life policies opening up in Canada, because it would reduce their profits when policies lapse or are surrendered.
I agree with you that it would be great if a senior could go into a bank and borrow against the future death benefit just like they can do with a reverse mortgage using the equity in their house.But it hasn’t happened yet in the US and it isn’t going to happen here unless you open your own bank or persuade CHiP to start making such loans through their new bank.
Thanks for leaving my e-mail address – I believe Canadians should be given the various options open to them and let them make their OWN informed decision about what to do with their life policy. Regards, Daniel
Hi Daniel,
I am not concerned about the profits of insurance companies. Lapse based pricing and encouraging policy lapses is a dirty secret of the life insurance industry. I do see your point about getting the FMV out of something like a T100 with no intrinsic cash value and the client was about to surrender the policy. In most cases there should be other options for clients rather than use a life settlement. And this new segment of the industry needs to be regulated. The Focused Money fiasco in Calgary (where I live) has turned me off Life Settlements as an investment option for clients until crooks like those at Focused Money are properly regulated.
Once this industry in regulated and legalized across Canada I will hold the opinion I have in my article. Thanks for the other side of the story – and for giving Canadians a reasonable alternative if they have no other options.
Mitch Reynolds
As a Canadian actuary who has been involved with promoting a regulated secondary market for Canadian policyholders to be able to access the embedded equity in their life insurance policies which they have built up over a number of years I must take strong exception to some of the “inaccuracies” whether deliberate or unintentional in this article.First of all how can the title say they are illegal in Canada when they are LEGAL in FOUR PROVINCES including QUEBEC.It was the Ontario government who introduced sec. 115 back in the Great Depression when policyholders who were surrendering their policies were being offered 80 cents on the dollar.Nowadays H&R Block are legally allowed to do the same with tax returns!! In the US life settlement companies offer a higher payout to those who are surrendering their life policies – what’s wrong with that?? And what about those who are lapsing their Term to 100 life policies because they can no longer afford the premiums or no longer require the insurance?? I agree that ideally a terminally-ill policyholder should access the Compassionate Living Benefit program provided their insurer but happens if they have accessed the program and have already used up the maximum $100K on a $1 m. life policy?? I was involved in such a case last year and was able to get the policyholder a $200K loan from a private lender to help for her 24/7 private nursing costs.
I have just set up a website similar to its US counterpart www,whatsmy policyworth.com to give Canadians an idea of what their policy is really worth before they lapse or surrender it.For more info you can contact me at dekahan@gmail.com.
Hello Daniel,
Thank you for your comment. I understand you are involved in the Life Settlements industry through your company, MaxLife Fund Corp. It is interesting to me that the only person to leave a comment on this article is an industry insider making a profit from selling life settlements in Canada. I was aware that some provinces do allow the trade in life insurance products like Saskatchewan, and that is why I placed there memo to insurance agents at the end of this article cautioning them when referring clients to life settlements companies to cash in their policies.
I still stand behind my opinion that life settlements are a problematic industry prone to corruption. It is not a mistake to tell investors that many previous life settlements companies in Canada have gone bankrupt and the investors have lost everything. This is another example of an unregulated industry that lends itself to high risk and corruption.
You make a few points above – what’s wrong with letting people surrender their insurance policies for a higher payout if they so chose? The same argument was made by the US banks – why regulate and control our investment and lending practices? The invisible hand of the market will balance all things out. Well, as we saw in the crash of 2008, lack of regulation leads to corruption and risky business practices by companies because there is little to no consequences against the bankers who play games with investors money. That looks and feels the same as the life settlements industry that promises double digit return on investment with no regulation or backing to support such claims. The Canadian banking industry is the shining example security solely because of strong government regulation.
You also point out that H&R Block has the right to pay people 80% of their tax return for the expedience of instant cash in hand. Well, this again prays on people who probably can’t afford to wait because of some outstanding loans and debts. At least those Canadians who have a large tax return and higher incomes would never use such a service because they know that 20% is far to high a cost to expedite their tax return. Any your industry – life settlements – is not offering 80% of the cash value of policies. In the example you gave a person surrendered 100% of the economic benefit of their policy in order to spend the 20% fronted her on care needs. And considering this is probably an older person in care, you don’t have many years to wait until you get the full $1MM payout. How nice for you!
I wonder what the policyholders family and beneficiaries thought about the policy being handed over? I think a life settlement, in the minority of provinces where it is actually legal (the majority of Canadian jurisdictions still keep this industry illegal) should be a last resort; after the policyholder has looked into using policy loans, collaterally assigning the policy to the bank for a secured loan, seeking financial support for family who could be named irrevocable beneficiaries, etc.
I will leave your link up on my website because Canadians deserve the right to know what their options are. But I still stand behind my opinion in this article that life settlements are not in the best interest of Canadian policyholders and should remain illegal (and be made illegal in the 4 provinces where they are still allowed).
Mitch Reynolds