Should seniors be able to sell their life insurance?

Life insurance

My views are generally left of centre, but every now and then certain “nanny state” provisions get my back up. For example, regular readers will know what I think of Ontario’s locking in provisions.

That’s why when both President of Canadian Lifeline Ltd. Daniel Kahan and Edward Gibbard, Managing Director, Perisen Capital Management Ltd. recently wrote to me independently about restrictions in Ontario and other provinces preventing people who need money (primarily seniors) from selling their life insurance policies in the secondary market, I figured I’d better educate myself on the subject.

Policyholders of permanent life insurance who can no longer afford to keep up the premiums or need money because they are ill or disabled may be able to surrender their policy to their insurance company and receive a cash payment. However Kahan says the amount they can receive is typically much less than if a third-party is willing to buy the policy, become the beneficiary and continue paying premiums until the policy holder dies.

Currently life settlements (formerly known as viatical settlements) are permitted in Quebec, Saskatchewan, Nova Scotia and New Brunswick. The legislation preventing life settlements in the rest of the country typically characterizes this practice as “trafficking in insurance.”

But even in provinces permitting third-party life settlements, Gibbard says life insurance companies have generally adopted very strict policies prohibiting their agents from engaging in or even discussing life settlements. “Frequently they threaten cancellation of their agents’ contracts if they do so,” he says.

The Ontario Red Tape Regulation Act 2000, removed Section 115 of the Ontario Insurance Act prohibiting life settlements but the Financial Services Commission of Ontario never passed the necessary regulations to bring this change into effect.

One suggestion put forward by  the Canadian Association of Insurance and Financial Advisors, in its response to FSCO’s consultation draft for permitting viatical settlements in Ontario, was to set them up as a loan. “Among [the benefits to the viator, or person selling the policy] is the ability to avoid tax liability and to pay to a beneficiary any part of the death benefit that remains after repayment of the loan and interest,” they said.

The issue is again a live one because under the guise of “modernizing” Saskatchewan’s Insurance Act, the province is planning to incorporate the anti-tracking provisions into their statute.

In an email sent last month to Janette Seibel, Lawyer, Financial and Consumer Affairs Authority of Saskatchewan, and Jim Hall, Senior Crown Counsel, Saskatchewan Legislative Services who are leading the consultation process on Saskatchewan Bill 171, Kahan suggested that by prohibiting life settlements for the sake of uniformity the province would be turning the clock back 80 years.

Because Ontario residents can sell life insurance policies outside the province, Kahan has set up Canadian Lifeline Ltd. registered in Nova Scotia. It matches policy-holders’ immediate cash needs with those of investors willing to provide structured loans that are repaid, together with accrued interest and charges, only at the time that proceeds of the policies are paid out upon the death of the policyholder (much like a reverse mortgage).

There is no doubt that there is potential for fraud if third parties are permitted to buy up insurance policies. Two of the more common viatical investment schemes in the U.S. have been:

  • Clean-sheeting where a life insurance applicant fails to disclose a pre-existing condition in response to a question on a life insurance application. Because medical exams are not required in all cases, a policy may be issued that can be re-sold.
  • Wet-ink policies in which the insured sells their policy or multiple policies from different insurance companies, sometimes within weeks, while there is little chance of finding they are terminally ill.

But Kahan is not aware of documented examples of life settlement fraud in Canada. He believes that just like pay day lenders are now regulated, properly-drafted life settlement regulations could provide an adequate level of consumer protection.

“It’s your money. You should be able to decide how and when you get to use it – not the insurance company,” says Kahan.

I agree with him. What do you think?

 

 

 

11 Comments

  1. Sheryl, great blog – I think you should be our next Premier !!
    On a more serious note for those who are NDP supporters, back in 1993 I approached Bob Rae then the Ontario NDP Premier and suggested the Ontario government legalize a “non-profit” viatical settlement company to help AIDS policyholders. In 1994 the Ontario Ministry of Health sponsored a Feasibility Study (which cost Ontario taxpayers around $100K) . In April 1997 (after Mike Harris became Premier) the 20 page Study was presented to the new PC Health Minister and never published. I obtained a copy through Freedom of Information and it can be downloaded from my Ontario Lifeline LinkedIn Profile.
    I think it’s time that Susan Eng and CARP start lobbying for seniors property rights (even if it might upset some of their corporate business partners) !!

    • Thanks Daniel.

  2. thank for the column. Will try again to comment as did not seem to publish first time.

    Obviously I agree with the substance however you do appear to misidentify in a couple of items. Section 115 of The Ontario Insurance act was NEVER repealed, although it should and that is the objective of my campaign, and Life Settlements by definition should NEVER be referred to as viaticals. Best

    • I would just like to clarify that Viatical Settlements are a SUBSET of Life Settlements. They refer to a terminally-ill policyholder with less than 2 years to live selling their life policy to a third party investor. Life Settlements refers to the sale of any life policy by their owner. In the US the IRS exempts Viatical Settlements from being taxed federally as income to the policyholder as long as they are sold to a regulated entity in those states which Viatical Settlement Regulations.
      Most states have now updated their Viatical Settlement Regulations to include ALL Life Settlements which what FSCO should be doing with their 2001 DRAFT Viatical Settlement Regulations.
      If FSCO and the Ontario Liberal provincial government cannot handle this for whatever reason, they should ask the Federal Finance Minister, Joe Oliver who is the MP for my riding Eglinton-Lawrence and a Senior, to get OSFI to deal with this for them and all the other provinces at the same time.

  3. Sheryl – good post. This is very important issue for Canadian seniors, and everyone who owns an insurance policy, and the public has a right to know about life settlements. The insurance companies try to co-mingle life settlements with “viaticals – note recent January RBC Insurance News bulletin, where they announced “new rules for viaticals,” implying life settlements. The Bill in Saskatchewan needs to be stopped if possible. Perhaps as a financial adviser, lawyer and journalist, you can help she some light on this issue. Keep the conversation going. Of Course, I recommend the book “Why Are Canadian Seniors Worth More Dead Than Alive?” by Leonard Goodman. It has most of what anyone needs to know in it.

    • Thanks. I may not get back to the topic for a bit but I happy to facilitate a dialogue.

      • I think this needs to be turned into a federal election issue !! Which national party is more concerned about the property rights of senior policyholders than the potential “miniscule” effect on the profits and share price of the large multi-national life insurers?? Where is the NDP ??
        One would hope that Joe Oliver as a senior and the Federal Finance Minister would tell Manulife and RBC to stop their “unfair restraint of trade” in Quebec or else refer the matter to the Federal Competition Bureau.
        What is needed is some political leadership like the late Jim Flaherty displayed when as Ontario Finance Minister he introduced Schedule G of the Ontario Red Tape Reduction Act 2000 to repeal sec. 115 of the Ontario Insurance Act.
        It’s time his widow who aspires to be the next PC Leader and future Ontario Premier should get up in Question Period and ask the Ontario Finance Minister why Ontario is willing to regulate Pay Day Lenders but NOT http://www.life-funding.com?
        It’s time FSCO is “forced” to update their July 2001 DRAFT Viatical Settlement Regulations to include all Life Settlements and send them out for Stakeholder Comments which are then made PUBLICLY available on their website.
        If Ontario is incapable or unwilling to do this, then let Ottawa step in and offer to take over the regulation of Life Settlements for ALL Canadian provinces INCLUDING Quebec and Saskatchewan.

  4. I just thought I would post a link to the 1996 Hansard of the Standing Committee on Private Bills debate on the Canadian Life Line Private Bill Pr 39 to be exempted from Sec. 115 of the Ontario Insurance Act.
    http://www.ontla.on.ca/web/committee-proceedings/committee_transcripts_details.do?locale=en&BillID=&ParlCommID=51&Business=Bill%20Pr39,%20Canadian%20Life%20Line%20Limited%20Act,%201995&Date=1996-04-24&DocumentID=19129

    19 Years later we are still HIBERNATING in Ontario !! It’s time for Spring !!

  5. with such a seemingly important issue, wondered why you would not get back it for a while>

    • Because there are lots of other important issues and I also have a day job :)

  6. Sheryl, it’s now August 2017 and 2.5 years after your last post ! With a Provincial Election in Ontario next year how about returning now to this issue and interviewing the Leaders and Senior Critics of each provincial party and CARP and Advocis to see where they stand on this Seniors issue.

    After waiting for so long for Ontario to come into the 21st century (now that they are finally allowing selected supermarkets to sell wine and cider) I have decided to join other Toronto Life Settlement companies who have opened offices in Montreal and create a new bilingual website http://www.life-choice.ca (which should keep the French language police happy).

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