The Financial Services Commission of Ontario (FSCO) Monday issued a warning about viatical settlements and other types of policy transfer arrangements.

FSCO is warning both consumers and life insurance agents that selling or transferring life insurance policies, in transactions that are often referred to as life settlements, viatical settlements, or Stranger-Owned Life Insurance (STOLI), “may not be legal in Ontario”. It says that an agent, or an insurer, who solicits or assists policyholders in “selling, trading, transferring, pledging or assignment of life insurance policies might be in violation of [insurance legislation].”

“Consumers considering such transactions should proceed with caution,” it says. And, it warns life agents that may advise policyholders on these sorts of transactions “should undertake the appropriate due diligence.”

“Such policies may not be valid because the third party that actually initiated the policy has no insurable interest in the life of the insured person,” it says. “In addition, the insured may be giving up the benefits of obtaining and owning a life insurance policy in the future. There is a maximum amount of aggregate coverage insurance companies are willing to issue to any individual.”

For instance, in STOLI transactions, FSCO says that the consumer obtaining insurance is often encouraged to procure the largest policy possible, regardless of their future insurance needs, thereby using up their insurability. “Uninformed or ill-informed participants may unwittingly sacrifice these rights and ruin any chance of obtaining needed life insurance after they participate in a STOLI transaction,” it says.

The regulator advises consumers that are approached to participate in these sorts of arrangements to contact their insurance company, or agent, to discuss the implications and their options.