Life settlements, also known as trafficking or trading in life insurance policies, involve the disposition by the insured of all rights under a life insurance policy to a third party in exchange for a cash payment. This payment is frequently discounted below the face value of the policy.
Only four Canadian provinces do not legislate against trafficking or trading in life insurance policies (Saskatchewan, Quebec, Nova Scotia and New Brunswick). Currently, all other provinces, including Ontario, strictly prohibit such activity.
Bill 162, An Act to amend the Insurance Act to authorize life settlements, is a Private Member’s Bill that seeks to amend section 115 of the Ontario Insurance Act to provide for an exception to the current rule which prohibits any person, other than an insurer or its duly authorized agent, from trafficking or trading in life insurance policies. The Bill seeks to provide an exception to the prohibition to the sale of a life insurance policy if the purchase is from the original policyholder, the policy has been held for at least 36 months and other prescribed requirements are met.
The Bill provides for a 10-day cooling-off period, during which time the agreement for the sale of a life insurance policy may be cancelled. The Financial Services Commission of Ontario is required to provide oversight to ensure consumer protection.
The proposed amendments to section 115 of the Ontario Insurance Act are quite controversial.
Those opposed to Bill 162 (including the Canadian Life and Health Insurance Association – CLHIA) argue the proposed amendments under Bill 162 or any exceptions to trafficking or trading life insurance policies under section 115, opens up a largely vulnerable population (senior policyholders) to potential financial exploitation. It is argued that Bill 162 will expose vulnerable consumers to fraud and abuses. The CLHIA has argued that in the U.S., where the market for life settlements has been active for several years, there is a track record of fraud and abuses that has proven to be an intrinsic part of the settlements industry.
Those in favour of Bill 162 argue that consumers deserve to have a choice similar to that enjoyed in the United States. Some argue that the proposed amendments to the Insurance Act provide an excellent option for millions of seniors who need or prefer cash under their current circumstances rather than the eventual payment of the full death benefit. In addition, those who no longer have a need for their policies have an alternative to letting their policies lapse. Further, those in favour argue that the amount of a life settlement is usually many times greater than the cash surrender value.
Bill 162 has passed second reading and is currently ordered referred to the Committee of the Whole House. No doubt the progression of this Bill will be followed closely by consumers as well as those in the insurance industry.