This article appears in the February 2021 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
A private member’s bill that would permit Ontarians to sell their life insurance policies to a third party has once again put the controversial issue of life settlement transactions before lawmakers, and the industry is pushing back.
“The bill has a lot of support — more than a lot of people would imagine,” said Rudy Cuzzetto, the Progressive Conservative member of provincial parliament (MPP) sponsoring Bill 219: Life Settlements and Loans Act, 2020. “During Covid-19, more than ever, our seniors would need access to these funds.”
The proposed Bill 219 would amend the prohibition enshrined in Ontario’s Insurance Act against the “trafficking or trading” of life policies so that the prohibition doesn’t apply to policies that are “sold or assigned by the original policyholder or a transferee, used as collateral security or donated to a charity.”
The proposed bill stipulates that a policy must be held for 24 months by the owner before it can be sold. The Financial Services Regulatory Authority of Ontario (FSRA) would oversee the life settlement sector.
In October, Bill 219 passed second reading and was referred to the Standing Committee on Finance and Economic Affairs. Three other PC MPPs, including the chief government whip, have spoken in favour of the bill, while three NDP MPPs have spoken against it. However, as with all private member’s bills, the odds against the bill becoming law remain high.
A 2017 attempt to introduce life settlements in Ontario, led by then-Liberal Party MPP Michael Colle, failed. Quebec is the only province to allow life settlement transactions. (New Brunswick, Nova Scotia and Saskatchewan used to allow trading in life policies, but New Brunswick amended its insurance act to prohibit trading in 2019, and Nova Scotia did so in 2020. Saskatchewan’s insurance act has a section prohibiting trading that is not yet in force.)
“[Bill 219] is not coming from government policy-makers,” said Susan Murray, vice-president of government relations and policy with the Canadian Life and Health Insurance Association Inc. (CLHIA) in Ottawa. “It’s a one-off private member’s bill.”
The CLHIA argues that permitting life settlements will leave seniors, particularly those facing economic hardship or in poor health, vulnerable to financial exploitation. “It’s not a very pleasant market to think about,” Murray said.
In a life settlement transaction, an insured person sells their life policy through a broker or directly to a funding company. This typically happens if the person needs cash, can no longer afford the premiums or no longer wants the policy. The funding company will offer a price that could be a multiple of the policy’s cash surrender value but lower than the death benefit. After the sale, the funding company continues to pay the premiums on the policy until the insured person dies, at which time the company receives the death benefit.
To determine the offer price, the funding company will factor in the insured’s age and health to determine life expectancy — generally, a shorter life expectancy means a higher offer. The company will build in a “rate of return” it’s seeking to realize. The broker earns a commission based on the price paid for the policy.
Longtime advocates, led by a small but vocal group of life insurance agents, believe life settlements give seniors the option of converting a policy that might otherwise be left to lapse into needed cash. Life settlement markets exist in the U.S., U.K., Japan and other countries, the advocates argue, and seniors should have the right to sell their policy if they wish. “You should have a choice — [the policy] is your asset,” Cuzzetto said.
The insurance industry argues that Bill 219 would allow bad actors to target seniors. “[Seniors] may sell a policy two years before their death at a fraction of the [death benefit], and then their beneficiaries don’t have anything two years later,” Murray said.
A document sent to Ontario MPPs in January by the CLHIA regarding Bill 219 argues that insurers already offer policyholders “safe, regulated and viable” options for accessing cash, including applying for living benefits under a policy, taking out a policy loan or reducing a policy’s face value to make premiums more affordable.
“Generally, you buy insurance for your successors, your kids and your family after you pass away —that’s certainly what insurance is for,” Murray said. Life settlement advocates want to tap into a potentially lucrative market in Ontario, she suggested, and “that’s why [this initiative] keeps coming back.”
Byren Innes, managing director and executive consultant with Jennings Consulting Ltd. in Toronto, generally supports allowing life settlement transactions if properly regulated. And proponents of Bill 219 argue the global pandemic has bolstered their case. “It’s a better time to propose this than in the past,” Innes said.
Innes suggested that insurers’ opposition is motivated in part by self-interest. If a secondary market were to be allowed, fewer life policies would lapse — since life settlement companies would pay premiums on policies they bought — and insurers would have to pay out a death benefit on more policies. When a policy lapses, insurers pay out nothing.
Insurers set premiums on existing policies assuming that a set percentage will lapse because a secondary market doesn’t exist, Innes said. If a life settlement business were allowed, insurance companies probably would need to raise premiums. “One could argue that that’s not good for consumers long term,” Innes said.
Nevertheless, Innes said, having the option of selling a policy in a secondary market would be “beneficial” for policyholders. There are many reasons people buy insurance, including for business purposes, and many reasons people no longer need their policies. “So why can’t they take the life insurance as property and sell it?” he asked.
However, Innes would like to see stronger safeguards than proposed in Bill 219, including a 30-day cooling-off period (as opposed to 10 days) and a requirement that any proposed life settlement transaction agreement be reviewed by a lawyer.
“Lots of transactions require independent legal advice,” Innes said. “I don’t know why [life settlement transactions] couldn’t be one of them.”
Harold Geller, a lawyer with MBC Law Professional Corp. in Ottawa who represents investors and insured individuals, said that allowing life settlement transactions “can work for a few consumers and a lot of salesmen.”
Bill 219 doesn’t adequately address the potential for abuse, said Geller, who is a member of FSRA’s consumer advisory panel.
Life settlement transactions place brokers in a potential conflict of interest similar to the one faced by investment advisors who counsel clients on whether to commute a defined-benefit pension plan, Geller said.
While a 10-day cooling-off period is welcome, “it isn’t much of a protection from a conflict of interest that promises [the broker] unforeseen riches,” Geller said. “We would need very strict regulation and professionalism in order for [Bill 219] to be in the consumer’s interest, and so far those hallmarks are not part of this proposal.”
Geller contends that life settlement transactions would be less of an issue for debate if insurers didn’t sell clients inappropriate policies or ones they didn’t need in the first place. “What you’re dealing with is mis-selling, at the root,” he said.
Donating insurance policies and Bill 219
The provision in the proposed Bill 219: Life Settlements and Loans Act, 2020, that expressly allows the donation of life insurance policies in Ontario could create issues, suggested Susan Manwaring, a partner with Miller Thomson LLP in Toronto.
Currently, Ontario’s Insurance Act does not expressly recognize charities as beneficiaries of insurance policies. However, the Financial Services Regulatory Authority of Ontario takes the position that charities can be beneficiaries of life insurance and has allowed such gifts.
Gifts of life policies to charities became a topic of discussion last year, when the British Columbia Financial Services Authority (BCFSA) appeared to take issue with certain types of these transactions. A subsequent bulletin issued by that regulator confirmed that charities could solicit and accept such donations — but uncertainty remained regarding which transactions the BCFSA would deem offside.
Ontario MPP Rudy Cuzzetto, the sponsor of Bill 219, wrote in an email to Investment Executive (IE) that “there is no need to repeat any of this [uncertainty] in Ontario; Bill 219 would, if passed, remove any ambiguity, and clearly allow charitable gifts of life insurance policies.”
In a subsequent email to IE, Manwaring wrote that clear legislation concerning the donations of life insurance would be helpful. However, “there are structures that use insurance gifts in a way that some find problematic. A straight exemption [as proposed in Bill 219] could create other issues.”