Selling Life Insurance In Canada: Is It Possible?

Life insurance is often purchased to provide financial security for loved ones in the event of the policyholder's death. However, in certain circumstances, policyholders may want or need to sell their life insurance policy. In Canada, selling a life insurance policy is possible but highly limited. Only four provinces currently permit the sale of life insurance policies: Quebec, New Brunswick, Nova Scotia, and Saskatchewan. In other provinces, such as Ontario, there are ongoing debates and efforts to legalize or restrict this practice.

When selling a life insurance policy in Canada, several conditions and factors come into play. The process, known as a life settlement or viatical settlement, involves selling the policy to a third party, usually for a lump sum that is less than the death benefit but more than the cash surrender value. This option is often considered when individuals face financial difficulties or can no longer afford the premiums. However, it is important to note that not all life insurance companies allow policyholders to sell their policies, and there may be tax implications associated with the sale.

Before selling a life insurance policy in Canada, it is essential to understand the conditions, legal restrictions, and potential alternatives.

Selling a life insurance policy in Canada: the basics

Selling a life insurance policy in Canada is possible but highly limited. Whether you can sell your policy will depend on your age and health, where you live, and your life insurance company.

Selling a life insurance policy may seem counterintuitive, but there are many reasons why someone might do so:

• They can no longer afford the premiums. Seniors lacking retirement funds may struggle to pay their insurance premiums and benefit more from selling them.
• They need the cash. Someone experiencing cash flow problems may need to sell their life insurance policy to access its cash component.

Who can buy your life insurance policy?

Third parties, like other insurance companies, might buy your life insurance policy as an investment. You can also sell your policy to another individual, such as a child, business partner, or friend. Ultimately, you can sell your policy to virtually anyone, given that both parties have written consent.

How to sell your life insurance policy in Canada

• Switch to permanent life insurance. If you have term life insurance with a convertibility option, you must first undergo this process to sell it. If your policy doesn’t have a conversion rider, you can’t sell it.
• Understand the tax implications. Death benefits on life insurance policies aren’t taxed, but sales on life settlements are. When you sell your life insurance policy, you’ll owe income tax for the amount you receive.
• Find a reputable broker. Finding a life insurance policy buyer is difficult – you can’t just list it online and wait for a bid. Hiring a broker can make the scouting process more accessible, but it takes time to compare rates. Some brokers charge commission rates as high as 40%, while others charge as low as 10%.
• Undergo the application process. You must complete an application for each life insurance settlement and grant the settlement company or third party permission to request information about your policy and health.
• Provide documentation. Once you’ve completed the application process, gather the appropriate documentation, such as medical records from your healthcare provider. Age and health play a significant role in determining how easy it will be to sell your policy. Younger, healthier people often get lower returns, whereas older people (often above 65) have better chances of selling their policies.
• Wait for the appraisal. You can’t just sell your life insurance policy for your desired sum. Underwriters will determine your policy’s market value and decide whether the investment is good or bad. They might consult medical experts regarding your health and look for any signs of fraud.
• Receive the offer. Assuming the underwriters determine your policy is suitable for purchase, they’ll extend an offer, which you can accept or decline.

Alternatives to selling your life insurance policy

Selling your life insurance policy may not be the most cost-effective option, even if you need the money. Here are some less complicated options:

• Cancelling the policy: if your policy is new and you can let it lapse.
• Using the accelerated benefit rider: if you become diagnosed with a terminal illness (you can access between 25% and 95% of the entire sum).
• Requesting to reduce the coverage amount: if you have a lenient insurance company that may understand your circumstances.
• Transferring your policy: if selling a life insurance policy is legal in your state and you can transfer it to a relative, such as a spouse, parent, or child.
• Getting a policy loan: if you have a whole life insurance policy that allows you to access the death benefit amount through a policy loan.

When is selling a life insurance policy a good idea?

Selling a life insurance policy is a big decision and not always the best financial move. However, there are certain situations in which selling your life insurance policy may be a good idea.

• You can no longer afford the premiums: If you're facing a cash flow crisis or can no longer afford the premiums, selling your life insurance policy can provide immediate financial relief. This is especially relevant for seniors who may be struggling to pay their insurance premiums and could benefit from selling their policies.
• You need cash: If you're experiencing cash flow problems or need money for unexpected expenses, selling your life insurance policy can provide access to extra cash. This is particularly useful if you have a permanent life insurance policy that has accumulated cash value over time.
• You no longer need the policy: If the reasons for paying the premiums no longer exist, such as being a widower without children or having wealthy children who don't need the payout, selling your life insurance policy can be a way to unlock value from an asset you no longer need.
• You want to relieve financial obligations: Selling your life insurance policy can free you from the ongoing financial obligation of paying monthly premiums. This can be beneficial if you're looking to reduce your monthly costs or relieve yourself of the burden of premium payments.
• You want to maximise value: While you have the option to cancel or surrender your policy, selling it usually offers a higher payout. This is especially true for permanent life insurance policies that have accumulated cash value.

It's important to carefully consider the long-term impact of selling your life insurance policy, as it may have consequences for your beneficiaries and estate planning. Additionally, there are tax implications, potential privacy risks, and the possibility of multiple resales that should be taken into account before making a decision.

Who can buy your life insurance policy?

If you're selling your life insurance policy in Canada, you can sell it to virtually anyone, given that both parties have written consent. This could be a third party, such as another insurance company, or an individual, like a child, business partner, or friend.

However, it's important to note that not all provinces or life insurance companies in Canada allow policyholders to sell their personal life insurance policies. For example, Quebec and Saskatchewan allow life settlements, but Ontario does not. Additionally, some insurance companies, like Sunlife, do not allow life settlements regardless of the province.

When selling your life insurance policy, it's crucial to be aware of the tax implications. While death benefits on life insurance policies are tax-free, sales on life settlements are taxable. This means that you will owe income tax on the amount you receive from selling your policy.

It's also worth mentioning that finding a buyer for your policy can be challenging, and you may need to hire a broker to facilitate the sale. However, brokers typically charge high commission rates, ranging from 10% to 40% of the purchase price. Therefore, it's essential to carefully consider all options before deciding to sell your life insurance policy.

How to sell your life insurance policy in Canada

Selling your life insurance policy in Canada is possible but highly limited. Whether you can sell your policy will depend on your age and health, where you live, and your life insurance company.

Selling a life insurance policy makes the most sense for someone who can no longer afford to pay their premiums or who has cash flow problems.

Step 1: Switch to permanent life insurance

If you have term life insurance with a convertibility option, you must first undergo this process to sell it. If your policy doesn’t have a conversion rider, you can’t sell it.

Step 2: Understand the tax implications

Death benefits on life insurance policies aren’t taxed, but sales on life settlements are. When you sell your life insurance policy, you’ll owe income tax for the amount you receive.

Step 3: Find a reputable broker

Finding a life insurance policy buyer is difficult – you can’t just list it online and wait for a bid. Hiring a broker can make the scouting process more accessible, but it takes time to compare rates. Some brokers charge commission rates as high as 40%, while others charge as low as 10%.

Step 4: Undergo the application process

You must complete an application for each life insurance settlement and grant the settlement company or third party permission to request information about your policy and health.

Step 5: Provide documentation

Once you’ve completed the application process, gather the appropriate documentation, such as medical records from your healthcare provider. Age and health play a significant role in determining how easy it will be to sell your policy. Younger, healthier people often get lower returns, whereas older people (often above 65) have better chances of selling their policies.

Step 6: Wait for appraisal

You can’t just sell your life insurance policy for your desired sum. Underwriters will determine your policy’s market value and decide whether the investment is good or bad. They might consult medical experts regarding your health and look for any signs of fraud.

Step 7: Receive the offer

Assuming the underwriters determine your policy is suitable for purchase, they’ll extend an offer, which you can accept or decline.

Alternatives to Selling Your Life Insurance Policy

Selling your life insurance policy may not be the most cost-effective option, even if you need the money. Here are some less complicated options you might consider:

• Cancelling the Policy: If your policy is new and you can let it lapse.
• Using the Accelerated Benefit Rider: If you become diagnosed with a terminal illness (you can access between 25% and 95% of the entire sum).
• Requesting to Reduce the Coverage Amount: If you have a lenient insurance company that may understand your circumstances.
• Transferring your Policy: If selling a life insurance policy is legal in your state and you can transfer it to a relative, such as a spouse, parent, or child.
• Getting a Policy Loan: If you have a whole life insurance policy that allows you to access the death benefit amount through a policy loan.

Alternatives to selling your life insurance policy

Selling your life insurance policy may not be the most cost-effective option, even if you need the money. Here are some less complicated alternatives to consider:

Cancelling the Policy

• If your policy is new and you can let it lapse.
• If you've been paying premiums for years or decades, it might not be worth cancelling.

Using the Accelerated Benefit Rider

• If you are diagnosed with a terminal illness, you can access between 25% and 95% of the entire sum.
• If your policy doesn't have an accelerated benefit rider, you will have to purchase it first.

Requesting to Reduce the Coverage Amount

• If your insurance company is lenient and may understand your circumstances.
• If you've already requested to reduce the coverage amount and were denied.

Transferring Your Policy

• If selling a life insurance policy is legal in your state and you can transfer it to a relative, such as a spouse, parent, or child.
• If selling a life insurance policy isn't permitted in your state or if you're transferring it to a non-family member who will experience financial loss.

Getting a Policy Loan

• If you have a whole life insurance policy that allows you to access the death benefit amount through a loan.
• If accessing the death benefit will put you in more debt, as the loan will accrue interest. If there is an outstanding balance when the insured dies, the company will deduct this from the death benefit.

Frequently asked questions