(February 13 – 11:45 ET) – Insurance and financial advisors in Ontario should exercise caution in the practice of trading life insurance policies, known as viatical settlements, until stringent regulations are put in place, warns the author of an article a publication.

In a story entitled “Trafficking in Human Misery” in the February issue of FORUM, the membership magazine of the Canadian Association of Insurance and Financial Advisors (CAIFA), author Andrew Rickard notes that “the U.S. experience has been horrific.”

Bill 119, the Ontario government’s most recent Red Tape Reduction Act, contains an amendment that will allow exemptions from the anti-trafficking rule in Section 115 of the Insurance Act and rules for viatical settlements. It will be legal to “traffic” or trade in life insurance policies as soon as regulations are developed that will set out the conditions.

Viatical settlement companies buy life insurance polices of terminally ill patients at a discounted rate (usually between 35% to 85%). They make a lump-sum payment to the policyholder upon transferring the beneficiary of the policy to the company. Having assumed ownership, the company pays the premiums and eventually collects the full death benefit from the insurance company.

The viatical industry took off in the United States during the late 1980s, when an increasing number of AIDS patients required immediate funds in order to pay for medical expenses.

“It’s very important that strict regulations and enforcement procedures be in place prior to Ontario permitting the marketing of viaticals,” says Jim Rogers, chair of CAIFA. “This is especially true since, in the nature of these settlements, one is often dealing with a financially vulnerable insured.”

In the article, Rickard questions the need for viatical settlements since most Canadian life insurance companies offer what are called living benefits. Policyholders can obtain a portion of the value of their life insurance policy directly from the insurer in the form of a loan. Living benefits don’t involve discounting the face value of the policy and any amount not paid to the terminally ill person will be paid to their estate at the time of death. Unlike viatical settlements, living benefits are paid tax-free to the insured.

Last November, in a letter to the Ontario Standing Committee on Government, CAIFA urged the government to exercise great caution before it allows exemptions from the prohibition against trafficking in life insurance policies.
-IE Staff