By Olev Edur
If you find you don’t really need the life insurance you’ve been paying for, there are ways to convert it to money in hand.
As we age and become increasingly susceptible to ailments, there may come a time when we wonder if that life insurance policy we’ve so diligently maintained over the years—but no longer need to underwrite the financial security of our loved ones— could be converted to cash. The money could make life more enjoy- able—or more bearable if, for example, one has limited time left and needs money for medical treatment or long-term care.
It’s not common knowledge, but there are indeed ways in which a life insurance policy can be translated into some ready cash. The choices available to you, however, can depend on the type and size of policy, your age, your health, and even where you live. The following are four options.
1. Surrender the policy for its cash value.
This is the easiest and most obvious solution, but it can be quite costly. Over the years, some insurance policies—Whole Life as well as Universal Life and Term-to-100 (through a “reserve”)— build up cash values that can be redeemed by the policyholder. The amount of this cash value will depend on the size and type of policy and especially how long you’ve been paying the premiums, but it will be substantially less than face value.
In addition, this payment can be “substantially taxable,” warns Jim Bullock, president of Gold Cross Insurance in Mississauga, Ont. “That kind of takes the fun out of it, especially if it puts you in a 50 per cent tax bracket.”
And, of course, this will mean the end of the policy—which is particularly disadvantageous for would-be beneficiaries if you are close to the finish line when you surrender it. Because of this, and because the cash value may be only a fraction of the death benefit, people often look elsewhere for a better return on the investment they have made over the years.
2. Apply to your insurer for a “living benefit.”
Also known as “compassionate care” and “accelerated” benefits, these arrangements were originally intended pri- marily to benefit terminally ill AIDS sufferers who had no expectation of liv- ing beyond another year or two. But as our life expectancy—and, hence, our vulnerability to illness—has continued to increase, the availability of such relief has been broadened to encompass many others who are aged or in need for any medical or financial reason.
“The details of how living benefits are paid out to a policyholder will vary by insurer,” says Kevin Dorse, assistant vice-president of communications and public affairs for the Canadian Life and Health Insurance Association. “You should have a conversation with your in- surer to learn if they are available and how these benefits work under your policy.”
The BMO Insurance Financial Hardship Life Advance, for example, will provide policyholders with a loan of 50 per cent of their death benefit to a maximum of $250,000, payable in five annual instalments, if they are faced with financial hardship and have a limited life expectancy (in this case, of five years or less). And BMO’s Compassionate Benefit Program includes a Terminal Illness Life Advance providing terminally ill policy- holders (those with a life expectancy of 12 months or less) with a lump sum advance equal to 50 per cent of the death benefit, again to a maximum of $250,000.
Manulife’s Elderly Policy Owner Assistance Program, meanwhile, is available to those aged 85 and older who are facing financial hardship for any reason; it provides policyholders with a loan of up to 30 per cent of their policy’s death benefit, to a maximum of $100,000, with interest charged at the Manulife Bank Prime Lending Rate (3.7 per cent at press time, likely somewhat higher as you read this article).
With all of these programs, the advances are tax-free and, perhaps more important, the policies remain in force, so beneficiaries aren’t left high and dry. However, these advances, plus accrued interest and any unpaid premiums, are deducted from the eventual death benefit, and the policy will be terminated once the total debt exceeds the death benefit.
3. Try to sell the policy.
The business of trading in life insurance policies by a third party (“life settlements” or “viaticals”) is now illegal in all Canadian provinces and territories except Quebec, although in the United States, viaticals constitute a multi-billion-dollar (and growing) industry. But while companies such as Canadian Life Settlements in Montreal will pay you for your policy, insurers don’t allow their agents to participate in such arrangements, even in Quebec.
“These transactions are not permitted at Sun Life Financial, re- gardless of the province in which the transaction takes place,” reads the Sun Life advisor’s website page dealing with viaticals. “Advisors must not be involved in the trading of these policies. This applies to all provinces, without exception.”
One of the reasons for this aversion on the part of provincial governments as well as insurers is undoubtedly the rampant fraud that has been seen in the US viaticals market. The website of the US nationwide law firm Silver Law Group cites statistics from insurance industry research firm Conning predicting that $51 billion worth of life settlement transactions will take place annually by 2028. But Silver Law goes on to quote a Federal Deposit Insurance Corporation warning that the viaticals industry is vulnerable to “Ponzi schemes, fraudulent life expectancy evaluations, inadequate premium reserves that increase investor costs, as well as broken promises of larger profit with minimal risk.”
Silver Law’s website concludes, “The industry is awash in inter- mediaries—brokers taking high fees and commissions and recom- mending speculative, illiquid life settlement-backed investment products to unsuspecting main street investors.” Other US legal websites describe viatical scams involving hundreds of millions of dollars and thousands of unwary investors who buy policies that aren’t as advertised or may not even exist.
While it’s illegal to trade in life insurance policies except in Quebec (where there’s been no similar evidence of widespread fraud), you’re still free to sell the policy yourself, regardless of where you live.
“It’s the business of trading that’s illegal,” Bullock says. “You can do what you want with your own life insurance policy because it’s your property. So if you have a family member, a friend, or a business associate who is willing to buy the policy at a discount and then pay maybe $1,200 a year in premiums for a $500,000 payout and get the proceeds tax-free in a few years, it could be a good investment for them.”
However, Bullock, who has been called as an expert witness in numerous court cases involving life insurance claim denials (30 on the go at press time), injects a note of caution: “When the death claim is made, the first thing the insurer will do is check your background, and if anything changed—you got a speeding ticket or had a hernia operation—between the time you applied and the time the policy was delivered and you didn’t notify them, the insurance contract is void- ed.” Of course, that’s the buyer’s problem, not yours, but that friend would become distinctly unfriendly if this were to happen.
4. Borrow against the policy (a “life loan”).
One option that is becoming increasingly common is the life loan. In this case, the insurance policy is used as collateral for a loan from a third party rather than from the insurer. The payments are tax-free, the amount you can borrow may be higher than you can get from your insurer, and there may be fewer restrictions than there would be with insurer loans or advances.
Daniel Kahan, a Toronto-based actuary and CEO at LifePoint Foundation for People With Special Needs in Toronto as well as a principal at Ontario Life Loan Intermediaries, helps policyholders arrange loans secured by their life insurance policies. “There is a need,” he says. “People come to me, and I try to help them.”
LifePoint arranges loans from a Toronto charity, although Kahan notes that the minimum loan value is set at $100,000. “That excludes a lot of low-income seniors who come to me with $100,000 of face value or less,” he says, but he has also helped ar- range smaller loans through other organizations, such as Elder-Care Fund- ing, where he is also a principal.
“Elder-Care is for policyholders requiring long-term or home health care and are aged 70 or older, but it’s the same idea,” Kahan explains. “They will pro- vide a series of payments directly to the care provider, and, no matter what, a minimum of 20 per cent of your policy’s payout value will go to your heirs or estate. The interest can be paid by retaining part of the loan in a reserve fund.”
Kahan suggests that loans may be a better option than outright sales. “The problem with selling a policy is that once you sell, you’re out of the game,” he says. In other words, with a sale the policy is gone for good, whereas with a loan there still may be a significant balance remaining for beneficiaries, al- though this again depends on how high the debt climbs.
With LifePoint loans, the interest rate is fixed at eight per cent for life. And while this rate is considerably higher than is the case with a lot of other insurer loans, Kahan points out, interest rates are on the rise. “Eight per cent is high now, but it won’t be so high as interest rates rise,” he notes.
Whether you choose an insurer’s advance, a third-party loan, or an out- right sale, you should, as with any major purchase, shop around before- hand. The benefits and costs can vary widely depending on your circumstances and needs. And given that complex legal contracts are involved, Kahan advises that you should always get independent legal advice before signing on the dotted line.