Can you sell your life insurance policy in Canada?

Selling a life insurance policy – often referred to as a life settlement – can provide a financial lifeline for those facing difficult situations, but it's not as simple as listing it for sale. In Canada, life settlements allow a policyholder to sell their life insurance policy to a third party for a lump sum. The buyer takes over paying the premiums and ultimately receives the death benefit when the insured passes away.

This option is appealing for individuals who need immediate cash for medical expenses or long-term care, or who can no longer afford their premiums. But in Canada, the legality and feasibility of selling a life insurance policy depend on several factors, including where you live and the type of policy you hold.

What does it mean to sell a life insurance policy?

Selling a life insurance policy involves the policyholder, typically someone with a permanent life insurance policy, selling their coverage to a third-party buyer, often a company or investor. Once the sale is completed, the buyer assumes responsibility for paying the policy premiums and will receive the death benefit when the original policyholder passes away.

The amount you receive from selling your policy will usually be less than the policy's death benefit but more than its cash surrender value. The buyer, meanwhile, is betting that they will receive a greater financial gain by collecting the full death benefit when the insured passes away.

What is a life settlement?

A life settlement is the process of selling a life insurance policy to a third-party buyer. The seller receives a payout that is typically less than the policy's death benefit but more than its cash surrender value. The buyer becomes the new owner of the policy, taking over premium payments, and ultimately collects the death benefit upon the death of the original policyholder.

This arrangement is beneficial for the buyer because they stand to make a profit upon collecting the full death benefit, while the seller gets an immediate lump sum, often used to cover medical bills or other financial needs.

An example of a life settlement

Let’s take the example of Margaret, a woman in her 70s who has a $50,000 permanent life insurance policy but can no longer afford the $100 monthly premiums. If she keeps the policy, she’s looking at over $16,000 in premiums over the next 14 years, based on her life expectancy. If she cancels the policy, she’ll lose all the premiums she’s paid, and her beneficiary won’t receive the death benefit.

In a life settlement, Margaret could sell the policy to a buyer who takes over the premiums and offers her a lump sum – say, $5,000 to $15,000 – based on the policy’s value. Margaret no longer has to worry about paying premiums and gains some immediate cash, while the buyer stands to receive the $50,000 death benefit when she passes away.

Why consider selling your life insurance policy?

There are several reasons why someone might consider selling their life insurance policy:

1. Need for immediate cash: Life settlements can provide policyholders with a lump sum to cover urgent expenses, such as medical bills, long-term care, or debt repayment.
2. No longer need coverage: If your beneficiaries are financially independent or you’ve accumulated enough wealth, you may no longer need the life insurance policy.
3. Unaffordable premiums: As you age, paying premiums can become a financial burden, particularly if you’re on a fixed income or have other financial obligations.

Better investment opportunities: The cash from a life settlement can be reinvested elsewhere, potentially offering better returns.

Is it legal to sell a life insurance policy in Canada?

Whether you can sell your life insurance policy in Canada depends on where you live. Currently, life settlements are legal in Quebec and Saskatchewan, but they are banned in most other provinces, including Ontario. In Nova Scotia and New Brunswick, life settlements were legal until 2020 when regulations changed.

In provinces where life settlements are prohibited, the main reason is that insurance companies and regulators are concerned about the potential exploitation of vulnerable policyholders. Opponents of life settlements argue that seniors, in particular, could be offered far less than their policy is worth, putting them at risk of financial abuse.

The U.S. vs. Canada: A different approach

Life settlements are much more common in the United States, where they became popular during the AIDS crisis of the 1980s. Many young men diagnosed with AIDS sold their life insurance policies to fund medical treatment or improve their quality of life, as they did not have beneficiaries to leave the death benefit to.

However, in Canada, the market for life settlements has faced significant opposition from life insurance companies and regulators. Critics argue that the U.S. system has seen cases of financial abuse, where vulnerable individuals were pressured into selling their policies for far less than their value. This concern has shaped the restrictive regulations around life settlements in Canada.

Pros of selling your life insurance policy

There are several advantages to selling your life insurance policy:

1. Immediate cash: One of the biggest benefits of selling a life insurance policy is receiving an immediate lump sum of cash, which can be used for medical expenses, debt repayment, or other financial needs.
2. Relief from premium payments: Once the policy is sold, the buyer is responsible for paying the premiums, freeing up money for the policyholder to use elsewhere.

No longer need the policy: If you no longer need life insurance coverage, selling your policy allows you to extract some financial benefit rather than letting it lapse or surrendering it for its cash value.

Alternatives to selling your life insurance policy

If selling your policy isn’t an option or doesn’t seem like the right choice, there are several alternatives available:

1. Policy loans: Many permanent life insurance policies allow you to borrow against the cash value of the policy. This option provides you with cash without selling the policy, and your beneficiaries still receive a death benefit (minus the loan amount).
2. Compassionate assistance: Some life insurance companies offer compassionate payments, which allow you to access part of the death benefit if you are diagnosed with a terminal illness. This option provides financial relief while keeping the rest of the death benefit intact for your beneficiaries.
3. Transfer ownership: In provinces where selling your life insurance policy is illegal, you can transfer the policy to someone with an insurable interest in your life, such as a family member. This person takes over paying the premiums and becomes the beneficiary, ensuring that the death benefit remains within the family.
4. Surrender your policy: If your policy has accumulated cash value, you can surrender it to the insurance company in exchange for the cash value. This amount is typically lower than what you would receive from a life settlement, but it’s an option if you no longer need the policy or can’t afford the premiums.

The bottom line

Selling a life insurance policy can be a viable financial option for some, but it’s not without its challenges. In Canada, life settlements are legal only in certain provinces, and even then, they may not be the best option for everyone.

If you’re considering selling your policy, it’s important to weigh the pros and cons carefully. While a life settlement can provide much-needed cash, you’ll be giving up the future benefit your loved ones would have received. Make sure to explore all your options, including policy loans, compassionate assistance, and policy transfers, before making a decision.

If you're unsure about your next steps, consulting with a financial advisor or life insurance expert can help you determine the best course of action based on your specific situation.

Also read 

• How much more do smokers pay for life insurance?
• 17 life insurance mistakes to avoid
• Life insurance for children