A new bill in Ontario proposes to legalize the controversial practice known as “life settlements” at a time when other Canadian provinces are moving to restrict it.
This move has reignited debate surrounding life settlements, which involve the sale of an in-force life insurance policy by a policyholder who seeks to cash in the policy prior to death to an investor who assumes responsibility for paying the premiums and becomes the new beneficiary.
Some stakeholders say life settlements should be legalized across the country to enable seniors to tap into a source of income that they’ve been paying toward for many years. However, others warn that life settlements can open the door to fraudsters preying upon vulnerable seniors and could lead to higher insurance costs for all consumers.
In early October, Mike Colle, a member of provincial parliament in Ontario, introduced Bill 162 – a private member’s bill that proposes to amend the Ontario Insurance Act to allow policyholders the right to sell their policies.
“What this bill tries to do is give people an extra option when they get a life insurance policy,” Colle said during the bill’s second reading. “If you come to a point in your life at which you want to sell your life insurance policy and get some money that you need now to take care of yourself or your wife or your family, you have that option in the life insurance policy.”
The bill has passed its first and second readings and has been referred to a committee.
Currently, life settlements are permitted in Saskatchewan, Quebec, Nova Scotia and New Brunswick.
Meanwhile, other provinces appear to be moving in the opposite direction.
In late October, the Quebec government released its 2017-18 budget implementation bill, which includes conditions and restrictions regarding life settlements. And Saskatchewan’s new Insurance Act, which is expected to be proclaimed in 2018, includes a provision that prohibits life settlements.
Life insurance companies have been vocal in their opposition to life settlements.
“Our members are not supportive of legalizing this market,” says Susan Murray, vice president, government and international relations, with Canadian Life and Health Insurance Association Inc. (CLHIA) in Ottawa. “Today, it’s illegal [in Ontario], [which], we believe, is for good reason.”
In the U.S., where life settlements are legal in most states, Murray says, the CLHIA has observed many instances of fraud involving these transactions.
“We’ve seen that this [part of the insurance] industry can be quite predatory, and preys on vulnerable seniors primarily,” she says. “Our concern is that people will get into this market and cash in their policy without fully understanding the implications for them and their families.”
However, individuals who need the money and no longer feel the need for life insurance should be entitled to the option of selling their policy, says John Norman, director and portfolio manager with Perisen Life Settlements Corp. I Inc. in Toronto, which facilitates life settlements for policyholders in the U.S. and in the Canadian provinces in which they are legal.
“[Life settlements] help seniors capture value from an asset that they’ve put money into – often for decades,” Norman says. “This is a very important tool for people who need to fund their retirement.”
For individuals who are looking to monetize their life insurance policy, there are ways of doing so without using life settlements, Murray notes. For individuals who have been diagnosed with a terminal illness, for example, some policies allow for early access to the death benefit. In addition, clients whose policies have a cash value can access money by borrowing against the policy or partially or fully surrendering the policy.
For policies that don’t provide those options, the prospect of a life settlement can be appealing to some clients, says Lawrence Geller, president of Campbellville, Ont.-based L.I. Geller Insurance Agencies Ltd. He says he has received inquiries from clients who are interested in selling their policies.
Similarly, Perisen receives several calls every week about life settlements from policyholders in Ontario and other provinces in which the transaction is not permitted, Norman says: “There are a lot of people who are indicating that they would like to be able to sell their policy.”
However, Bill 162 could have unintended consequences, says Ami Maishlish, president of Markham, Ont.-based CompuOffice Software Inc., the company that developed life insurance quotation software LifeGuide. Specifically, he says, legalizing life settlements could lead to a smaller proportion of policies lapsing, which would interfere with the insurers’ risk calculations and potentially drive premiums higher across the board.
“The best interest of the public is not served by Bill 162 for the simple reason that the general public will have to pay to subsidize the profits of the life settlements population,” Maishlish says.
He suggests that if life settlements are to be legalized in Ontario, policyholders who wish to have the opportunity to sell their policy at a future date should be required to add a rider to their policy at the time of purchase for an additional fee – similar to a return of premium rider.
“That way,” Maishlish says, “[other policyholders] won’t be forced to pay for something that they don’t need.”
Bill 162 also neglects to ensure that the individual whose life is insured has control over the policy’s ownership, Maishlish says. As the policyholder is not always the same person whose life is insured, he says, the proposed bill could enable a policyholder to sell a policy to a third party without the insured individual’s knowledge.
“A life settlement should never be permitted unless the life insured agrees,” he says. “That’s missing in Bill 162.”
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