We are often hit by life-changing circumstances that make maintaining a life insurance policy unnecessary or unaffordable.
Perhaps your kids have grown up and are living independently, or you have sold your business, and your investments can no longer carry the burdens of monthly premiums.
Suppose you are suffering an unforeseen medical condition or financial setback that makes accessing immediate funds necessary. In that case, selling your life insurance policy might be your best bet to maximize your financial outcome and peace of mind.
Selling your life insurance policy isn’t an easy decision to make, but most times, it can be a quick and easy way to ease financial pressure when you are in need.
What are Life Settlements in Canada?
A life settlement also called a viatical settlement, is when you (the insured) sell your life insurance policy to another person (a third party) for an amount that is less than the death benefit but more than the cash surrender value.
Life settlements let you receive a lump sum of cash immediately, which you can use to sort your financial problems at the expense of your life insurance policy.
The third-party who buys the insurance policy becomes the policyholder and pays the monthly premiums. They also receive the full death benefit when the life-insured die.
For example, suppose you are 70 years old and have a $50,000 permanent life insurance policy with a $100 monthly premium that you can no longer afford because you have money issues.
In this case, if you cancel your insurance policy, you will forfeit all your premiums, and your beneficiary won’t receive any death benefit when you die. You can even choose to collect your cash surrender value, but it is so tiny compared to your total death benefit payout.
However, selling your insurance policy to a third party might be an option. Selling your life insurance policy provides much-needed cash and frees you from all future premiums.
So, suppose your retirement fund is running low, and you wish to stop paying premiums but need immediate cash to pay for housing, care, or anything else. In that case, selling your life insurance policy is a better option because it pays more than the cash surrender value, and it’s better than letting the insurance policy lapse.
Are Life Settlements Legal in Canada? Can I Sell My Life Insurance Policy In Canada?
You might be among the many Canadians asking their insurance professionals, ‘Can I sell my life insurance policy in Canada?’.
However, it is complicated, and there is no straightforward answer to this question. It is allowed in some provinces, while some legislations limit the selling of life insurance policies in other Canadian provinces.
Quebec, New Brunswick, Nova Scotia, and Saskatchewan are the only provinces that currently allow selling life insurance policies. There have been several attempts to legalize it in Ontario, but it has been met with resistance.
The majority of Canadian provinces chose to outlaw life settlement even though there have been many recent attempts to legalize it in all Canadian provinces.
The Canadian Life and Health Insurance Association (CLHIA) resisted the movement to legalize life settlements in Canada. CLHIA claims that it exposes senior Canadian policyholders to financial abuse.
Canadians who support the movement claim that life settlement offers an option to individuals who might need immediate cash given their financial situations.
Benefits Of Selling Your Life Insurance Policy
You can eliminate the burdens of paying costly premiums: When you sell your life insurance policy, you are eased of the burden of paying the monthly premiums.
The new policyholder takes responsibility for the policy including paying the premiums. You get an immediate value of your policy in cash and stop paying premiums.
You get the value of your policy immediately: When you are going through financial tough times and you need immediate cash, saving for the future might sound unreasonable.
Selling your life insurance policy gives you access to immediate cash that you can use for whatever you need, like pay debts, housing, vacations, or even check some items off your bucket list.
You get more cash than surrendering or lapsing: When you sell your life insurance policy, you will get an amount greater than the Cash Surrender Value (CSV). Surrendering your policy will offer your only cents on the dollar.
Selling your insurance policy is always far better than surrendering or leaving it to lapse.
Downsides Of Selling Your Life Insurance Policy
One of the obvious downsides to selling your life insurance policy is that you will loose your coverage, and your beneficiaries will get no payout if anything were to happen to you. Depending on your situation, this may mean you are exposing your loved ones to financial risks
The other downside to selling your life insurance policy is the tax implications. When you sell your insurance policy, you will pay taxes on the amount you earn from the policy. The amount you earn that exceeds the premiums you paid on the policy will be taxed.
For example, suppose you paid $30,000 in premiums for your life insurance policy and sell it for $45,000. In that case, you will pay taxes on the $15,000 you earn.
However, you can work with a financial advisor or insurance professional to help you manage your expenses and minimize liability at tax time.
Is Selling Your Life Insurance Policy A Good Idea?
Yes and No. If you are living in Canadian provinces where life settlements are legal, it might not be a bad idea to sell your life insurance policy when you no longer need your insurance policy, or your insurance premiums are becoming unaffordable, and you are in need of immediate cash.
For example, if you are past retirement, your insurance premiums are becoming increasingly difficult to pay up, your mortgage is paid, your children are done with school, and your beneficiaries no longer need the payout, then it’d be better for you to sell your insurance policy rather than make it lapse.
On the other hand, life settlements have tax implications, and you may want to consider other alternatives before making the call to sell your life insurance especially if you are selling mainly because you need immediate cash to ease your financial burdens.
Alternatives to Selling Your Life Insurance Policy
In provinces where life settlement is legal, selling your life insurance policy is an easy way out of financial burdens. However, living in provinces like Ontario, where life settlements are illegal, you may want to find ways to ease your financial burdens.
Let’s look at a few alternatives to selling your life insurance policy.
1. Transfer Your Life Insurance Policy
While selling your life insurance policy is illegal in some provinces, you can transfer your insurance policy and change the policyholder even without changing the beneficiary.
You can transfer your life insurance policy to your child, grandchild, or other relatives. The new policyholder must have an insurable interest in your life.
An insurable interest means they expect to be financially affected if you were to pass away. The new policyholder continues to pay the policy’s premiums and receives the total death benefit payout.
2. Consider Compassionate Assistance
A compassionate insurer can assist an insured with a portion of the death benefit payout after a terminal diagnosis. Typically, this happens when there is a diagnosis of fewer than two years to live.
Compassionate assistance gives the insured a chance to die however they want by taking care of the financial burdens, including flights around the world, unique gifts to loved ones and caregivers, and lots more.
However, a compassionate payment is an early payment from your death benefit and will reduce the size of your death benefit.
3. Take Policy Loans
There is a chance to access your death benefit if you are in need through policy loans. A policy loan allows the policyholder to borrow money from their policy using their cash surrender value as collateral.
You should know that the interest on the loan accrues and will be paid while the policyholder is alive or be added to the cost of the loan.
The loan’s outstanding balance will be deducted from the death benefit payout when the insured dies.
Final Thoughts on Life Settlements
Selling your life insurance policy might seem like your only option, but it isn’t. You can take a pick from one of these alternatives above to ease your current financial burdens.
However, considering the pros and cons of selling your life insurance policy, you can best prepare for your old age to avoid financial burdens that will lead to selling your life insurance policy.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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