Reshaping the face of life insurance
At the end of 2001, Canadians owned approximately $2.2 billion in life insurance, according to the Canadian Life and Health Insurance Association. More than $900 million of that total was held in Ontario. If you are one of the thousands of people with such a policy, you’ll be interested in a discussion that’s on the brink of reshaping the face of life insurance in that province and, ultimately, in this country.
The change has to do with an amendment to Ontario’s Insurance Act that will allow a policy owner to sell his or her policy to a third party.
Currently, the only options for someone who no longer wants, or can no longer afford, to keep a life insurance policy in force are: 1) collecting the surrender value of the policy, effectively selling the policy back to the insurer; or 2) allowing the policy to lapse.
Policy owners who no longer need insurance coverage but who find themselves in need while they’re still alive may be sitting on an immediate and, in many cases, substantial asset.
Ontario sets stage for country
The implications of the new rule are huge, and regulators across the country are ndoubt watching the proceedings in Ontario. While the current discussion by surrounds what’s known as viatical settlements, a newer twist under the name life settlements has fallen into the discussion. In a life settlement, the policy owner does not have shortened life expectancy through chronic or terminal illness (a condition associated with viatical settlements), but must be 65 years of age or older. Both life and viatical settlements are based on the same principle: the policy owner gets an immediate payout—a percentage of the death benefit in cash—while investors get a share of the death benefits when the insured person dies.
However, the amendment has been on hold while the government figures out how best to regulate these transactions. There are questions, for example, about whether securities or insurance regulations should preside. The overall challenge, of course, is how best to protect consumers and address the interests of various industry players.
Privacy and ethics paramount
Resistance has focused on concern about ethics and privacy. Indeed, there’s no getting away from the fact that an investor is banking on the policy seller’s untimely death for profit. And, in the U.S., where viaticals have a longer tradition, they have a reputation for fraud, appearing regularly on “top” investment scam lists and garnering colourful media images of hit men.
Proponents say there are solutions: A a non-profit agency to handle the transactions is one. Michael Freedman, who heads up Coventry First, a life settlement company that’s been operating in the U.S. for the past two years, says another answer is to allow only qualified institutions, rather than individuals, to buy the policies and to legislate another level of anonymity to ensure the privacy of the policy seller. “Our funder is not allowed to know the identity of the individual. And if they decided to sell that pool or part of that pool, our covenant rides with it that that it’s not allowed to be disclosed under any circumstances.” Freedman also points out that none of the examples of U.S. viatical fraud cited by critics (in the course of the government’s consultations back in 2000) involved abuse of the policy seller.
Life settlements are experiencing double-digit growth rates in the U.S.—not surprising given the payouts are almost always substantially bigger than the value from surrendering a policy. In all likelihood, Canada will follow. A lack of suitable regulation — even in the few provinces that don’t prohibit outright trafficking in life insurance policies, there are no rules — already puts consumers at risk. Our regulators must take what lessons they can from the U.S. experience to ensure regulations protect both sellers and investors. But the amendment to allow viatical settlements was introduced as part of the Ontario government’s Red Tape Reduction Act of 2000, and draft regulations for consultation were released in 2001.
The longer we wait, the greater the risk for consumers, and the greater the chance some needy seniors will stay needy despite holding a valuable asset. No doubt, for many, it’s already too late.