Selling life insurance policy, also known as a life settlement, occurs when a policyholder sells their policy to a third party for immediate cash. The buyer then takes over the premium payments and receives the full death benefit upon the original policyholder’s passing.
For many Canadians, especially seniors, this can seem like a lifeline when premiums become unaffordable or a lump sum of cash is needed. However, the path is complex and filled with legal and financial hurdles that vary significantly across Canada.
Our guide will provide you with up-to-date information on whether and how to sell your Canadian life insurance policy.
Why Would You Want to Sell Your Life Insurance Policy?
There are two main reasons a Canadian policyholder may want to go through the complex process of selling a life insurance policy:
- Inability to Pay Premiums: For many retirees on a fixed income, rising premiums on a permanent policy can become an unsustainable financial burden.
- Immediate Access to Cash: A life settlement provides a lump-sum payment that can be used to cover medical expenses, pay off debt, or fund retirement, offering more than the policy’s cash surrender value but less than its death benefit.
Can You Legally Sell Your Life Insurance Policy in Canada?
Whether you can sell your life insurance policy depends on four key factors:
Provincial Regulations
This is the most critical factor. The legality and regulation of life settlements are a provincial matter.
Legal and Regulated
In Quebec and Saskatchewan, life settlements are fully legal and regulated, offering consumer protection through government oversight. British Columbia also allows life settlements, but without formal regulations.
Banned or Restricted
As of recent legislative reviews, Nova Scotia and New Brunswick have prohibited life settlements, citing consumer protection concerns and the need for more robust laws.
Legal Gray Area
In provinces like Ontario, Alberta, and Manitoba, there is no specific legislation that either permits or prohibits life settlements. No law says “you can sell your policy”, but no law says “you can’t”. This absence of regulation creates an environment where transactions happen without oversight, consumer protection, or standardized processes.
While a sale might be technically possible, it carries substantial risks:
- Predatory offers: Without regulatory oversight on pricing, you may receive lowball offers that are far below your policy’s fair market value.
- Lack of recourse: If a broker or buyer acts unethically, your legal options for recourse are limited and potentially very expensive compared to a regulated province.
- Privacy concerns: You will be required to share sensitive personal health information. In an unregulated market, there are fewer guarantees about how that data is stored, used, or protected.
- Potential for fraud: The lack of licensed, vetted players increases the risk of encountering fraudulent schemes.
Therefore, it is absolutely essential to work with a highly reputable broker and seek independent legal and financial advice before entering into any agreement.
Age and Health
Your age and current health status are important in determining the feasibility of selling your life insurance. Generally, the market for life settlements favours older policyholders (typically 65+) with a decline in health. This is because a shorter life expectancy increases the potential return on investment for the buyer. Younger, healthier individuals will find it very difficult to receive a worthwhile offer.
Insurance Company Restrictions
Some of Canada’s largest providers, like Sun Life, have internal policies that prohibit life settlements under any circumstances.
Even seniors in poor health cannot sell their policies issued by one of these companies. It is crucial to review your policy documents or contact your provider to confirm their stance before proceeding.
Type of Life Insurance Policy
Only permanent life insurance policies with an accumulated cash value (like Whole Life or Universal Life) are typically eligible for sale. Term life insurance policies, which have no cash value, cannot be sold directly. You must first exercise a conversion privilege to convert the term policy into a permanent one, if your policy allows it. However, it can be difficult to qualify for permanent life insurance after the onset of health conditions and advancing age.
Who Can Buy Your Life Insurance Policy?
If you decide to sell your life insurance policy, there are two potential types of buyers to be aware of:
Institutional Investors
This includes dedicated life settlement companies, specialty asset management firms, private equity funds, and even some insurance companies, which see value in buying policies as profitable investments.
Individual Investors
These are private, high-net-worth individuals who wish to purchase a life insurance policy for personal investment purposes. They often include family members, business partners, or financial backers who have an insurable interest in the policyholder.
How To Sell Life Insurance in Canada
If you’ve weighed the risks and alternatives and still wish to proceed, follow these steps carefully.
Convert Term to Permanent Coverage
If you currently have a term policy, your first step is to convert it to a permanent policy. Contact your insurer to confirm your conversion eligibility.
Understand the Tax Implications
Speak with a fee-only financial advisor and a tax professional. Death benefit payouts are not taxed, but proceeds you receive from a life settlement are considered taxable income for the seller. You may owe capital gains tax on the amount you receive over your policy’s cost basis.
Find an Experienced Independent Broker
An experienced life settlement broker acts as your agent and advocate. They will professionally package and market your policy to interested buyers, help you negotiate the best price, and handle all legal documentation.
Follow our guide to vet a Life Settlement Broker:
- Licensing: In regulated provinces like Quebec, ensure they are licensed by the provincial authority (e.g., the AMF). In gray-area provinces, ask for proof of business registration and professional liability insurance.
- Fee Transparency: The broker must be upfront about their commission structure. Fees are negotiable and should be clearly stated in writing. Ask if their fee is a percentage of the death benefit or the settlement amount.
- Experience: Ask how many transactions they have successfully closed in your province.
- No Upfront Fees: A reputable broker is paid only upon the successful sale of your policy. Never pay an application or “due diligence” fee.
- Independence: Ensure they work for you and are not tied to a single buyer. Their job is to shop your policy to the entire market.
Gather Policy Documents
Collect your original policy documents, recent annual statements showing cash value and death benefit, and your insurer’s contact information.
Complete the Application
This initial application asks for your personal, financial and medical details so that your broker and potential buyers can accurately assess your policy’s current value based on your life expectancy. Be honest about your health and medical history.
Provide Access to Your Medical Records
You must sign a release allowing the broker and potential buyers to access your full medical records to assess your life expectancy.
Undergo a Life Expectancy (LE) Evaluation
Buyers will commission a third-party medical underwriter to produce a formal Life Expectancy report. This is the primary driver of your policy’s valuation.
Buyer Underwriting and Bidding
It takes time for interested buyers to thoroughly underwrite and evaluate your policy for bid consideration based on your age, medical status and life expectancy. Your broker should then present you with multiple, competing bids.
Review Offers and Negotiate
Once underwriting is completed, the buyers extend formal offers based on their appraisal of your policy’s worth. Never take the first offer. Your broker should help you negotiate for the best possible price and terms.
Finalize Legal Paperwork and Receive Funds
Once an offer is accepted, lawyers for both sides will handle the change of ownership and beneficiary documents. The funds are typically placed in escrow and released to you upon final confirmation from the insurance carrier.
Alternatives to Selling Your Life Insurance Policy
Before making the big decision to sell your life insurance coverage, be sure to explore alternative options with your insurance advisor:
- Let Your Policy Lapse: If the policy has little to no cash surrender value and premiums are unaffordable, simply stopping payments may be the simplest option.
- Accelerated Death Benefit: If you are diagnosed with a terminal illness, many policies allow you to access a significant portion of your death benefit tax-free while you are still alive.
- Reduce Coverage: Ask your insurance provider if they can reduce the death benefit on your policy. Lowering your coverage lowers your monthly premium to a more affordable level, allowing you to keep the policy active.
- Transfer Ownership: You can transfer legal ownership of your life insurance policy to another person, such as a spouse, parent or adult child. This keeps the policy active but removes the premium payment burden from you.
- Policy Loan: Many whole life and universal life policies allow you to borrow against the cash value built up in the policy over time. This policy loan gives you cash now while the loan balance gets deducted from your eventual death benefit.
The bottom line
Selling your life insurance policy through a carefully structured life settlement contract can make sense as a last resort, particularly in certain situations, such as unaffordable premiums or an immediate need for cash. However, caution must be taken to avoid scammers in this complex process. Be sure to work only with reputable, licensed brokers who prioritize your best interests.
FAQs on Selling Life Insurance Policies in Canada
How long does it take to sell a life insurance policy in Canada?
The entire life settlement process typically takes a minimum of 4-6 months from start to finish. It takes time for brokers to market your policy, for buyers to underwrite and evaluate it, negotiate offers, and finalize all legal paperwork. Expect anywhere from 6 months to a year.
Where can I find buyers interested in buying life insurance policies in Canada?
Specialized life settlement firms like Coventry First are the main institutional buyers. You can also work with an experienced broker who already has relationships with various private equity firms, hedge funds, and high-net-worth individuals looking to invest in life settlements.
What percentage of the death benefit can I expect to receive when I sell my life insurance policy?
For seniors over 65 who are in poor health, you may receive up to 70% of the total death benefit. However, younger or healthier policyholders expect closer to 30-40% of the total benefit. The offer depends on your specific age, health prognosis, and type of permanent policy.
Do I need to pay taxes on the money I get from selling life insurance policy?
Yes, proceeds from a life settlement in Canada are considered taxable income for the policy seller, unlike the tax-free death benefit your beneficiary would receive. Consult a tax advisor to understand the implications of capital gains.
Can I sell my life insurance policy if I'm not a senior citizen?
Yes, policies can be sold by younger individuals, too. However, seniors over 70 tend to get better offers since their life expectancy is lower, increasing the policy's investment value for buyers. Under 60, expect very low offers.
What documents do I need to provide to sell my life insurance policy?
You'll need to provide your policy documentation, medical records release form, ID, contact info for your insurance provider, and detailed personal/financial info. Failure to provide full documentation can hurt offer amounts.
Do I have to pay commissions or fees when I sell my life insurance policy?
Yes, you will pay a broker commission of 10-40% on the total amount of your life settlement. This compensates them for marketing your policy, finding buyers, and handling legal work. There may also be various transaction fees.
Can I sell a term life insurance policy?
Most term policies cannot be sold. You would need to first convert your term policy to whole life, universal life, or another permanent insurance product before selling it through a life settlement would be possible.
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