Budget and Invest sometimes tackles difficult financial questions. One which has come up consistently is: Can I sell my life insurance in Canada? Read on for the answer to this question.
What’s a life settlement?
When a person with insurance sells the policy they have, this is referred to as a life settlement, also sometimes known as a viatical settlement. The sale price is typically more than the policy’s cash surrender value, but also less than the death benefit.
When you do this, you get your lump sum immediately, though at the expense of your policy. Then, the new policyholder will pay the monthly premiums, and will also receive the full benefit upon your death.
So, can you sell your life insurance in Canada?
Yes, you can sell your life insurance policy in this way in Canada. Selling life insurance in Canada is complicated, however, because it can only be done in certain areas. What’s more is, even in the areas where selling your life insurance is allowed, it’s still only allowed by certain companies under certain circumstances.
For example, the life insurance company Sunlife Insurance never allows a life settlement, regardless of where in Canada you are.
Where can you sell your life insurance in Canada?
In Canada, a life insurance settlement is legal in the provinces of Saskatchewan, Nova Scotia, New Brunswick and Quebec only. In recent years, there have been several attempts to make selling life insurance policies legal in Ontario, too. But, since this means fewer profits for insurance companies, these attempts have been totally blocked.
What are the problems with selling life insurance?
As we just touched upon, there was recently an attempt to amend Ontario’s insurance act, in 2017. All was going swimmingly until the Canadian Life and Health Insurance Association (also known as the CLHIA) began to protest voraciously against the attempt. This was partially because life settlements would mean less profits. But, the CLHIA also argued that giving Ontarians the ability to sell their life insurance opens seniors with policies up to financial abuse.
Still, people who support viatical settlement say that it gives people in dire financial circumstances who need immediate financial assistance, a good option. After all, a viatical settlement pays you far more than a cash surrender value, and it’s a better idea than just letting your policy lapse. From your insurance company’s point of view, though, a policy lapse is a good source of profit.
Are there alternatives to selling your life insurance?
So, unfortunately, for one reason or another, selling your life insurance simply isn’t legal in many parts of Canada, and is even still frowned upon by some insurance companies in provinces where it is allowed! If you live in one of these provinces though, don’t despair, because there are a few equally lucrative alternative options to life settlements.
How do you transfer life insurance in Canada?
One of these alternatives to a life settlement is the option of transferring your life insurance policy. Instead of selling your policy, simply change its beneficiary!
However, do be aware that the new policy owner has to have insurable interest in the life of the person insured. To have this, the new policy owner must be likely to suffer a financial loss when the person insured passes away. Transferring your life insurance policy is covered under the Ontario Insurance Act.
So, if you have someone in your life who has insurable interest, this person will be allowed to take over your policy, pay your premiums, and become your policy’s beneficiary.
People typically transfer their life insurance policy to someone like a child or grandchild.
Since there may be tax implications arising from a life settlement transaction, make sure that you get in touch with a tax lawyer.
Then there’s the Personal Health Spending Account, or PHSP. You’re probably well aware that most benefits programs for employees in Canada have certain restrictions and limits on their usage. And, if you don’t have access to a plan like this, of course, you must pay for health care using your own money.
This is what the PHSP is great for. The PHSP is a government benefit that yields a good health care strategy to people who are owners of incorporated businesses or are self-employed. If you are someone who claims expenses on your income tax, you may not be able to take full advantage of the Personal Health Spending Account. However, if you are considering getting life insurance for healthcare, the Personal Health Spending Plan can make a great alternative. Check out WEALTHinsurance.com to find out more about this.
What about compassionate assistance?
Many insurance companies also offer the option for a compassionate payment after a terminal diagnosis. After the diagnosis, your insurer will pay a portion of your death benefit before you pass away.
Generally, a compassionate assistance payment warrants a person to have a diagnosis of less than two years to live. But, the payment can help you out in whatever way you like — a gift to a caregiver, a flight around the world, or even hotel rooms for family to be nearby.
Compassionate payments are not taxed. Do be aware that a compassionate payment will reduce the size of your death benefit, however, since it’s an early payment of the benefit. You also must still pay your monthly premiums, too.
What are policy loans?
Rather than having to deal with life settlements, the life insurance industry prefers to make it easy to access a portion of your death benefit before the event of your death. This is done with a policy loan.
A policy loan lets you borrow money from your insurer by using the cash surrender value of your policy as a form of collateral. The interest that then accrues can be paid either while you are alive, or added to the cost of the loan, so that when you die, the outstanding balance will get deducted from your death benefit payout.
This all sounds simple enough, right? But there are a couple of other things you should know about policy loans. With this type of loan, you are only able to borrow an amount up to the value of your cash surrender value. Sometimes you are permitted to borrow only a certain percentage of your value, like 80%.
On top of this, you still have to pay your premiums, meaning you still run the risk of your policy lapsing.
Plus, despite the popularity of term life policies, you can only take out a policy loan on a whole life insurance policy, since term life insurance policies have no cash surrender value for you to borrow against.
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Photo credit, Pictures Of Money, Via Flickr.