Selling your life insurance policy, also called a life settlement, differs from surrendering your policy, taking a policy loan, or making a collateral assignment against its cash value. Whether or not you can sell your policy to a third party depends on the rules in your province.
To distinguish a third-party sale from other policy options, our content team reviewed FSRA’s warning about trafficking in life insurance, section 115 of Ontario’s Insurance Act, FSRA’s guide to life-insurance policy types, and the Canadian Council of Insurance Regulators’ contact list.
In this guide, we’ll explain how Ontario’s rules apply to selling your policy, how to find out whether this is allowed in your province, the differences between these policy options, and what to confirm before sharing any personal, policy, or health information.
Can You Sell Your Life Insurance Policy In Canada?
In some cases, the sale may be prohibited. For example, section 115 of Ontario’s Insurance Act restricts the practice of life settlements, which could make a life settlement illegal.
Seling your life insurance policy to a third-party buyer is not something that is uniformly regulated in Canada.
Before you accept an offer from anyone or decide to sign a policy assignment, you should contact your provincial regulator, insurer and a qualified specialist to learn more about your province’s requirements.
Is It A Sale, Surrender, Loan Or Assignment?
| Transaction | What normally changes | Question to ask first |
|---|---|---|
| Life settlement | A third party purchases an interest in the life insurance contract and continues paying premiums. | Does provincial law permit this transaction and the people arranging it? |
| Policy surrender | The insurer pays the policy’s cash surrender value. This terminates the permanent life insurance policy. | What is the current net surrender value and tax reporting amount? |
| Policy loan | The policyholder borrows against available policy cash value. | What interest, repayment, lapse and tax consequences apply? |
| Collateral assignment | A lender has a security interest in policy proceeds to the extent of the secured debt. | What form and insurer acknowledgment does the lender require? |
| Absolute assignment | Ownership interests can be assigned according to the contract, the insurer’s transfer procedure, the insurable-interest rules, and applicable law. | Is the intended transfer valid, and who controls premiums and beneficiary changes afterward? |
| Beneficiary change | A change of beneficiary is not a change in ownership. | Is the beneficiary designation revocable, and are consent or family-law limits involved? |
What Ontario’s Section 115 Means For A Policyholder
Section 115 restricts who may buy, sell or arrange life insurance policies to insurers and those authorized to act for them. As a result, some life settlements may be illegal in Ontario. A policyholder should consult an Ontario insurance lawyer before agreeing to a sale or signing an assignment.
Options For Accessing Your Policy’s Value
Need cash or having trouble keeping up with premiums? Selling may not be your only option. Consider your policy’s cash value, outstanding policy loans, guarantees, benefits and surrender charges. Also think about whether you and your beneficiaries still need life insurance coverage.
Term life insurance policies generally don’t have a cash value. If you have a permanent insurance policy, however, there may be other options, such as:
- Borrowing against your policy’s cash value
- Surrendering the policy for its cash value
- Reducing the death benefit amount
Any options, charges, fees, terms and conditions will be spelled out in your policy. Read them carefully before deciding.
Alternatives To Selling Your Life Insurance Policy
| Option to ask about | May help when | Trade-off to confirm |
|---|---|---|
| Reduce the death benefit | Lowering the policy’s face amount would reduce current or future policy costs. | Reduces coverage for beneficiaries. The consequences could be permanent and irreversible. |
| Use a non-forfeiture option | The permanent life insurance policy provides options such as reduced paid-up insurance or extended term insurance. | The option may change the policy’s death benefit, term, cash value or riders. |
| Take a policy loan | The policy has cash value and the policyholder understands the loan terms. | Interest, lapse, reduced proceeds and tax consequences can apply. |
| Surrender the policy | You no longer need life insurance and accept the policy’s net cash value. | You will lose the coverage and may pay a surrender charge or owe taxes. Obtaining a new policy may be difficult or cost more. |
| Use a conversion right | A term life insurance policy is close to expiring and can be converted without new evidence of insurability. | Permanent coverage can be more expensive. Converting the policy does not create a legal settlement market. |
| Ask about an accelerated benefit | Your life insurance policy has a feature that applies to your situation, and you meet its medical definition. | Check if the contract specifies your eligibility, tax implications and the remaining death benefit. |
Read More: Compare Keeping Life Insurance With Cashing Out the Policy
Questions To Send Your Insurer In Writing
- What are my policy’s current death benefit, guaranteed death benefit, cash value, surrender value, premium, outstanding loans and surrender charges?
- What options are available to me, such as reduction, non-forfeiture options, dividend options, premium-offset options, policy loans, withdrawals, conversion or accelerated benefits, and what tax slips apply to each option?
- What policy-gain calculation does the company use for each of these options?
- What forms, consents, proof of identification and company acknowledgements are required to carry out these options, particularly a surrender or assignment?
- How will my beneficiaries, riders, future premiums, likelihood of lapse and insurability be affected by each option?
Read More: See How Life Insurance Cash Value Is Calculated and Withdrawn
Consider Taxes, Privacy And Independent Advice
Selling or surrendering a life insurance policy may have tax implications. Get advice from a Canadian tax professional about the consequences of the specific transaction. Generally, the calculation is based on the amount you receive less the policy’s adjusted cost basis, but special rules may apply. The Department of Finance explains section 148 in more detail.
Find out what personal information, such as identity, policy, financial and health information, the buyer or intermediary needs and what they’ll do with it. Ask about data privacy and security practices: Who gets access? How is it stored? How might they share your information? What happens to your information if the transaction falls apart? Ask about commissions, fees, conflicts of interest and cancellation rights.
Before making your final decision, get independent advice from a lawyer and tax professional whose pay is not based on whether the transaction goes through. Ask your provincial regulator whether the person and proposed transaction are permitted.
Read More: Compare a Policy Sale With Borrowing Against Life Insurance