Life is full of unexpected twists and turns that can lead us to reevaluate our financial situations and explore unique opportunities. One such financial tool that many Canadians rely on to secure their loved one’s financial future is life insurance. Typically, life insurance is designed to provide financial support to our beneficiaries after we’re gone rather than serving as a source of immediate cash while we’re still alive.
However, circumstances can change. Your children may have grown up and become financially independent, your business might have been sold, and your investments may no longer cover the monthly premiums. Alternatively, you could face unforeseen medical conditions or financial setbacks requiring immediate funds access.
In these situations, one option worth considering is selling your life insurance policy for a cash payout, a process facilitated by life settlement providers. While it may not be an easy decision, it can often offer a quick and effective solution to alleviate financial pressure when you are in need. In this blog post, we will shed light on selling life insurance in Canada, shedding light on an important aspect of financial planning.
What are Life Settlements in Canada?
A life settlement, also known as a viatical settlement, involves selling your life insurance policy to a third party for an amount that falls between the death benefit and the cash surrender value.
This financial transaction allows you to immediately receive a lump sum of cash, solving your financial challenges. In return, the third party becomes the new policyholder, assuming responsibility for the monthly premiums and ultimately receiving the full death benefit when the insured person dies.
Let’s break it down with an example: Imagine you’re 70 years old and hold a $50,000 permanent life insurance policy with a $100 monthly premium. However, you can no longer afford the premiums due to financial difficulties.
If you were to cancel the policy, you’d lose all the premiums you’ve paid, and your beneficiary would receive no death benefit upon your passing. Alternatively, you could opt for the cash surrender value, but it’s significantly lower than the total death benefit payout.
Instead of these options, you can sell your insurance policy to a third party. Doing so provides you with much-needed immediate cash and relieves you of all future premium payments.
This can be especially beneficial if your retirement fund is dwindling and you need the cash to cover expenses such as housing, care, or any other pressing financial need. Selling your life insurance policy is a superior alternative to letting it lapse because it yields more than the cash surrender value, ensuring a better financial outcome.
Are Life Settlements Legal in Canada? Can I Sell My Life Insurance Policy In Canada?
Many Canadians ask insurance professionals, “Can I sell my life insurance policy in Canada?” However, the answer to this question is not straightforward, as it is a matter of legal complexity. The ability to sell life insurance policies varies from one province to another in Canada.
Currently, only Quebec, New Brunswick, Nova Scotia, and Saskatchewan allow selling life insurance policies. In contrast, efforts to legalize it in Ontario have faced significant resistance.
Despite several recent attempts, most Canadian provinces have outlawed life settlements. This decision has been met with resistance from those advocating for its legalization.
The Canadian Life and Health Insurance Association (CLHIA) has been a staunch opponent of legalizing life settlements in Canada, citing concerns about potential financial abuse against senior Canadian policyholders.
Supporters of the movement argue that life settlements provide an essential option for individuals facing immediate cash needs due to financial situations. The debate over the legality of life settlements in Canada continues, leaving Canadians with differing opinions on the matter.
Benefits of Selling Your Life Insurance Policy
Selling your life insurance policy can offer numerous advantages that significantly impact your financial situation. Here are some of the benefits of selling your life insurance policy in Canada:
- Elimination of Costly Premiums: One immediate benefit of selling your life insurance policy is the relief from the burden of paying monthly premiums. When you sell your policy, the new policyholder takes over responsibility for the policy and its premium payments. This means you stop paying premiums, reducing your ongoing financial commitments.
- Immediate Access to Policy Value: During times of financial hardship, saving for the future might seem impractical. Selling your life insurance policy provides a solution by giving you immediate access to your policy’s cash value. This cash can be used for various needs, such as paying off debts, covering housing expenses, going on vacations, or fulfilling items on your bucket list.
- Higher Payout Compared to Surrendering: Opting to sell your life insurance policy often results in receiving a larger sum than the Cash Surrender Value (CSV) insurance companies offer. Surrendering your policy typically provides only a fraction of its value, making selling a much more financially attractive option.
Downsides Of Selling Your Life Insurance Policy
One of the most apparent downsides of selling your life insurance policy is that you will lose your coverage entirely, leaving your beneficiaries with no payout in case of your passing. Depending on your specific circumstances, this could expose your loved ones to financial risks that may be difficult to bear.
Another significant drawback to selling your life insurance policy is the associated tax implications. When you decide to sell, you will be liable to pay taxes on the amount you receive from the policy sale. The taxable portion is any amount earned from the sale that surpasses the total premiums you paid on the policy over the years.
To illustrate, let’s say you paid a total of $30,000 in premiums for your life insurance policy and manage to sell it for $45,000. In this scenario, you will be subject to taxes on the $15,000 that you earned through the sale.
However, it’s important to note that there are strategies you can explore to help manage your expenses and minimize your tax liability when tax time rolls around. Working closely with a knowledgeable financial advisor or insurance professional can provide you with valuable guidance in navigating these complexities.
Is Selling Your Life Insurance Policy A Good Idea?
The answer is both yes and no. It can be a sensible decision if you live in a Canadian province where life settlements are legal. Selling your life insurance policy may make sense when you no longer require the coverage, find the premiums unaffordable, and urgently need cash.
For instance, if you’ve already retired, are struggling with rising insurance premiums, have paid off your mortgage, your children have completed their education, and your beneficiaries no longer depend on the policy payout, selling the insurance policy could be a prudent step to take instead of allowing it to lapse.
However, it’s important to note that life settlements have tax implications. Before deciding to sell your life insurance, especially if your primary motivation is immediate financial relief, exploring other alternatives and considering the potential tax consequences carefully is advisable.
Alternatives to Selling Your Life Insurance Policy
In provinces where life settlements are legally permitted, selling your life insurance policy can provide a straightforward solution to financial challenges. However, residing in provinces like Ontario, where life settlements are prohibited, may compel you to seek alternative ways to alleviate your financial burdens. Here are some of the alternatives to selling your life insurance that you can consider:
1. Transfer Your Life Insurance Policy
While selling your life insurance policy might not be an option in certain provinces, you can explore the possibility of transferring ownership. This transfer allows you to change the policyholder while keeping the beneficiary unchanged.
You can transfer your life insurance policy to a family member, such as a child, grandchild, or another relative, provided they have an insurable interest in your life. Insurable interest signifies that they expect to face a financial impact in the event of your passing. The new policyholder assumes responsibility for paying the policy premiums and will ultimately receive the full death benefit payout.
2. Consider Compassionate Assistance
In cases of terminal illness, compassionate assistance from your insurer could offer relief. Typically, this option becomes available when a prognosis indicates a life expectancy of fewer than two years.
Compassionate assistance provides the insured with access to a portion of the death benefit payout, which can be used to address various financial needs. This may include fulfilling personal wishes, such as international travel, unique gifts for loved ones and caregivers, and more. However, it’s important to note that a compassionate payment represents an advance from your eventual death benefit and will consequently reduce the final payout amount.
3. Explore Policy Loans
If you need funds, policy loans can provide a means to access your death benefit. A policy loan allows the policyholder to borrow money from the policy, utilizing the cash surrender value as collateral.
It’s essential to be aware that interest accrues on the loan, and the policyholder can either pay it during their lifetime or have it added to the loan balance. When the insured passes away, the outstanding loan balance will be subtracted from the death benefit payout.
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Final Thoughts on Life Settlements
Whether you’re looking to explore life settlements or considering alternative options, you have choices when it comes to managing your life insurance policy.
If you’re considering selling your life insurance policy, remember that eligibility criteria and regulations may vary by province. It’s crucial to consult with a financial advisor or an expert in this field to explore the best course of action tailored to your specific circumstances.
Ultimately, the decision to sell your life insurance policy should align with your financial goals and needs. So, take the time to weigh your options carefully and make a well-informed choice.