Wondering if you can sell your life insurance policy in Canada? BrokerLink is here to answer your questions. Continue reading to learn all about the complicated business of selling life insurance in Canada.
The types of life insurance policies in Canada
To understand how selling life insurance works, it’s important to define the different types of life insurance policies in Canada, as the type of policy you want to sell matters. Below is a breakdown of a few of the most common types of life insurance plans, which can give you an idea of how life insurance works in Canada:
Term life insurance
Term life insurance is by far the most popular type of life insurance policy in Canada. With term life insurance, the insurance company will issue a payout to your named beneficiary or beneficiaries following your death, so long as you die within your policy term. As the policyholder, you get to decide how long you want the term to be at the time of purchasing your policy. Common terms are 10, 20, and 30 years. If you outlive your term life policy, you can choose to let it expire and continue without coverage or renew your policy, adjusting the term length as necessary.
Whole life insurance
Whole life insurance, which is also referred to as permanent life insurance, also results in an insurance payout upon your death. However, these policies do not have term lengths. Rather, they are guaranteed to cover you for your entire life. Another difference between term and whole life insurance policies is that whole policies have cash value, since the insurance company invests your premium on your behalf. Some even pay dividends.
Universal life insurance
Universal life insurance policies are similar to permanent life insurance policies in that they cover you for the entirety of your life and have cash value. However, where they differ is that they give the policyholder control over where their money is invested. If you are financially savvy, a universal life insurance policy might be a great option. By having a say in where your premium is invested, you could end up with a larger return on investment. Since you are responsible for managing these investments, it does require more time and energy than a standard whole life insurance policy.
Term to 100 life insurance
Term to 100 life insurance is another type of life insurance policy, which also covers policyholders until they pass. With term to 100 life insurance policies, there are no investments or cash value, which results in cheaper rates. They do, however, have the bonus of not having to pay your premiums if you live to be 100 years old.
Annual renewable term life insurance
One last type of life insurance in Canada is annual renewable term life insurance. It is a type of short-term life insurance, with policies typically lasting around one year. This is not one of the more popular life insurance policy options as it is only useful for people in very specific scenarios, such as if you have short-term debt, are between jobs, or are trying to get healthier before buying a long-term life insurance plan.
For a complete guide to life insurance in Canada, contact BrokerLink.
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Life settlements in Canada
Now that you know about some of the different types of life insurance policies available to you, let’s dive further into the topic at hand: selling life insurance in Canada. When you sell a life insurance policy in Canada, it is what’s known as a life settlement or a viatical settlement. Specifically, a life settlement is when an insured policyholder sells their life insurance policy to a third party. Typically, the original policyholder earns more than the cash surrender value but less than the death benefit amount from the sale. Plus, the policyholder is able to receive payment immediately and in one lump sum. From there, the new policyholder is responsible for paying monthly premiums. The advantage for them is that they receive the full death benefit amount upon the original policyholder’s death.
Can you sell a life insurance policy in Canada?
It depends. Selling life insurance can be complicated in Canada, depending on the conditions of your policy, what insurance company your policy is with, and which province you live in. Life settlements, where a policyholder sells their personal life insurance coverage to a third party buyer, are legal in some provinces - namely, Quebec and Saskatchewan. In other provinces, it’s a bit of a gray area. In addition, there are some insurance companies, like Sun Life Insurance, that prohibit policyholders from selling life insurance under any circumstances.
Why sell your life insurance policy?
If you are having trouble understanding why someone would want to sell their life insurance policy in Canada, let’s look at the following scenario: Mary just turned 75 years old and cannot afford to pay the $150 monthly premiums on her $50,000 whole life insurance policy any longer. Going by the average, Mary’s life expectancy is roughly 7 more years. Multiply 7 by her annual premium, and Mary still has $12,600 worth of payments to make. She has the option of cancelling her policy, but then her past premium payments go to waste and her beneficiaries still do not receive her death benefit. If her insurance company allows it, she might be able to receive her cash surrender value, but this is significantly smaller than the death benefit amount. This leaves Mary with a third option, which is to sell her life insurance policy to a third party. She finds a third party buyer, who offers her less than her death benefit minus the anticipated cost of future premiums but more than the cash surrender value. This seems like the best option for Mary. If she agrees to the sale, the buyer will pay Mary the agreed-upon amount up front, continue to make Mary’s premium payments on her behalf, and then when Mary dies, the buyer will receive the death benefit payout.
This example highlights why selling a life insurance policy might be the best option for many policyholders.
Can I sell my term life insurance policy?
As mentioned above, whether or not you can sell any type of life insurance policy, will depend on factors like where you live and what insurance company you are with. Not all provinces or insurance providers allow policyholders to sell life settlements. If you live in a province where you can sell your life insurance policy and your insurance company agrees to it, selling a term life insurance policy might look a little bit different than selling a whole life insurance policy. Typically, selling a term policy is harder and more complicated than selling a whole life one. This is because, with term policies, you could outlive the term, which means there is no guarantee that the buyer would receive the death benefit.
A reminder that with a term life insurance policy, the insurance company only issues the payout if the policyholder passes away within the policy term. This means that if you sold your term life insurance policy to a third party but you outlived the term, they would not receive anything. Given this, you may not have many takers. That said, there are a couple of scenarios in which selling your term life insurance policy might be possible and more attractive to potential buyers:
- If you converted your term life policy into a whole life policy, so that the buyer would be guaranteed the death benefit amount upon your death.
- If you have a terminal illness and are not expected to live long, making the buyer far more likely to receive the death benefit payout since you are expected to pass before the end of the term.
Please note that if you want to sell your term life insurance policy and choose to go the first route of converting your term life plan to a whole life plan, there may be some restrictions. First, you will only be able to do this if your term life policy has a conversion rider and the conversion rider is still valid. Most term life insurance policies contain conversion provisions. However, they can also be added to your policy for a small fee. Conversion riders typically come with expiry dates and an adjusted premium, which is higher. So you will need to consider both of these factors before converting. In the event that your term life insurance policy does not contain a conversion rider or it has expired, you may be out of options. Speak with a BrokerLink insurance broker to learn more or receive professional advice on what to do in such a situation. A BrokerLink advisor can also inform you of what life insurance policies must contain so that if you buy a policy in the future, you will know what to look for.
Things to consider before selling your life insurance policy in Canada
Before deciding to sell your life insurance policy, if this is an option for you, be sure to think long and hard about whether this is the right decision for you. Selling your life insurance coverage may be worthwhile if you are seriously ill or can no longer afford to make your insurance payments. However, you should still take the time to consider the following factors before selling your policy:
The process of switching from a term life insurance policy to a permanent life insurance policy
The first thing to consider is the process of switching from a term life insurance policy to a permanent life insurance policy. This consideration assumes you have a term life insurance policy, the most popular form of life insurance in Canada. If you already own a whole life insurance policy, then you will not need to consider this factor.
Since term life insurance policies are typically harder to sell since there is no guarantee of a payout, you will likely need to convert your term life coverage to whole life coverage if you wish to sell. Converting your plan is not an option for all policyholders, so the first step is to review the terms and conditions of your current life insurance plan to see if it contains a conversion rider. If it does, make sure to confirm the expiry date. If the conversion provision has expired, there is likely no way for you to convert your plan. If it hasn’t expired, speak with an insurance broker about converting your plan. Even if you have the ability to convert your term life coverage, doing so can be expensive. The new premium will be much higher than what you are currently paying, which could still mean that you will have a hard time selling to a third party buyer.
The state of your health
If your health is deteriorating rapidly, such as if you have been diagnosed with a terminal illness, you might have an easier time selling your life insurance policy, even if you have a term life policy. The reality is that shortened life expectancies increase the odds of a payout, which is what the third party buyer will be most interested in.
The province you live in
At the end of the day, not all Canadian provinces and territories allow policyholders to sell their life insurance policies. For example, it is legal for residents of Quebec and Saskatchewan to sell their life insurance coverage to third parties, but not for residents of Ontario.
Your insurance company
The insurance company you bought your coverage through can also determine whether or not you can sell your life insurance plan. Thus, you will need to contact an insurance broker or insurance agent to find out if they allow life settlements. SunLife Insurance is an example of an insurance company that does not allow its policyholders to sell their life insurance policies, regardless of what province they live in.
Enlist the help of a broker
Purchasing life insurance is complicated enough, let alone selling it. Therefore, before selling your life insurance policy, make sure that you contact a reputable insurance broker near you for help. BrokerLink has a team of life insurance specialists who can help you navigate this complex process. They can give you advice on whether selling your life insurance policy is worthwhile, as well as advise you on whether it’s even an option where you live.
Obtain life insurance quotes from various insurance companies
Whether you enlist the help of a licenced insurance broker or not, you should always obtain multiple life insurance quotes from other providers when selling your life insurance policy. This way, you will know whether you’re selling your policy for a good price. Many insurance companies offer free life insurance quotes that can be obtained online.
The sale is taxable
One last consideration before selling life insurance in Canada is related to taxes. If your policy has a named beneficiary, the death benefit amount is typically not taxed when issued upon your death. However, selling a life settlement is a different story. If selling a life insurance policy is legal in your province, the sale will likely be subjected to taxes.
Alternatives to selling a life insurance policy
You may decide that selling your life insurance policy doesn’t make sense for you. Depending on where you live or which insurance company you're with, you may discover that selling your policy simply isn’t an option. In either case, the experts at BrokerLink have put together a list of alternatives to selling your life insurance policy in Canada:
Transfer the life insurance policy
Your first option is, instead of selling the life insurance policy, transfer it to someone else. Selling a life settlement might be illegal where you live, but changing the name of the policyholder is not. However, it’s worth noting that if you go this route, the new policyholder needs insurable interest in the life insured. In other words, they must expect a financial loss in the event that the life insured were to die. Therefore, life insurance policies are typically transferred to spouses, children, grandchildren, or other relatives.
Policy loan
A policy loan is another alternative to selling a life insurance policy that could alleviate any financial trouble you may be experiencing. A policy loan enables a policyholder to borrow money from their insurance company, using the cash surrender value of the plan as collateral. Subsequently, interest will accrue on the loan, which can either be paid off by the policyholder while they are still alive or added to the total cost of the loan.
With the latter, when the policyholder dies, the outstanding loan balance will be subtracted from the death benefit payout. Note that if you choose to go with this option, you will likely not be allowed to borrow any more money than the value of your cash surrender. In some cases, you might even only be allowed to borrow a percentage of the cash surrender value, such as 80%. Further, policy loans are not typically available on any and all life insurance policies. They are usually only available to those with whole life insurance policies since term life insurance policies do not have cash values associated with them.
Compassionate payment
If you have been diagnosed with a terminal illness, then a compassionate payment might be an alternative to selling your life insurance policy that you can take advantage of. A compassionate payment works like this: Upon receiving your diagnosis, your insurance company may agree to pay a portion of the death benefit amount before the policyholder passes away. To receive compassionate assistance, the diagnosis typically needs to indicate a life expectancy of two years or less. Compassionate assistance can help ease the financial burden that comes with such a situation, giving the policyholder the means to die in a way they see fit. It is important to note that accepting compassionate assistance from your insurance provider will minimize the death benefit amount. However, the good news is that compassionate payments are not taxed.
Speak to your insurance company about reducing coverage
If the main issue is that you can no longer afford to make your monthly premium payments, consider speaking with your insurance provider. If you explain your situation, they might be willing to come up with a solution, such as reducing your coverage to lower your monthly payments. You can learn more about life insurance costs in Canada and what mistakes to avoid when buying insurance, such as purchasing a policy you cannot afford, by contacting BrokerLink.
Cancel your life insurance policy
Cancelling your life insurance policy is another alternative to selling, though this isn’t generally recommended. If you cancel your policy before you die, then your premium payments will have been for nothing and your beneficiary will not receive the death benefit amount upon your death. However, if your life insurance policy is relatively new, then letting it lapse could make the most sense. A BrokerLink insurance broker can help you make this decision.
Reach out to BrokerLink for more information on selling life insurance coverage in Canada
BrokerLink is your go-to brokerage for all things life insurance. We can walk you through the process of selling life insurance, as well as give you tips on fitting life insurance within your estate planning. Our insurance experts can also answer questions like, “How much is life insurance?”, or “How much life insurance do I need?” Get in touch today to speak with a licenced life insurance expert.
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