How to sell your own life insurance policy in Canada

“Can I sell my life insurance policy?” is a question Canadian insurance professionals are often asked. This might seem counterintuitive—after all, we purchase life insurance to safeguard the financial security of our loved ones in the event of death, not to provide an infusion of cash while we’re still alive.

But some policyholders do sell their own policies, usually because of a personal cash flow crisis or an inability to continue paying premiums. Since life insurance can be considered an “investment,” so to speak, selling could make sense. It likely isn’t an easy decision to make, but selling a life insurance policy can be a relatively quick and simple way to ease financial pressure in a time of need.

Can you sell a life insurance policy in Canada?

The short answer is: “Yes!” But in the majority of Canadian provinces, there are laws in place that limit how and to whom you can sell your policy.

This has been a controversial issue for decades—in fact, New Brunswick and Nova Scotia recently amended their individual insurance acts to make the selling of life insurance policies more restrictive, while a private member’s bill currently making its way through the Ontario legislature seeks to increase the freedoms associated with selling a personal life insurance policy. Saskatchewan, meanwhile, introduced new restrictions to the selling of life insurance policies in 2015, but has yet to enforce them.

Why all the fuss? Susan Murray, vice president of government relations and policy at the Canadian Life and Health Insurance Association (CLHIA), explains that what the majority of provincial governments have chosen to outlaw is “life settlements” (also known as “viatical settlements”). A life settlement is when a policyholder sells his or her life insurance policy to a third party—usually an individual or a company that specializes in the trafficking of insurance policies—in exchange for a one-time cash payment. When the policyholder dies, the third party receives the full value of the policy.

This might seem like a fair arrangement, but life settlements often leave ill-informed policyholders—especially vulnerable seniors who may be in dire need of cash—at risk of exploitation. “[A third-party] advisor might call and say, ‘You have a $100,000 policy. I’ll offer you 30%—so, $30,000—and give you cash tomorrow,” explains Murray. Not only might the policy be worth significantly more than that, but other serious problems could arise. “When they give cash to the person, it’s taxable. If it’s a senior who is on GIS [the Guaranteed Income Supplement], suddenly they’ve got a reported taxable income of $30,000, and they’re no longer eligible for GIS. There are a lot of implications that aren’t explained to them when they’re offered this kind of deal.”

You may be able to sell a policy “in trust” to a family member in certain provinces. For example, life settlements are currently permitted only in Quebec. But if you live in another province, plenty of options for selling your life insurance policy are still available to you. The buyer must be someone who wants to see you live a long time, though. Murray says: “If I couldn’t afford the premiums anymore, and my kids or another family member wanted to pay them for me, I could transfer my policy to them. If I couldn’t pay my premiums for a year but I wanted to keep the policy, I could probably negotiate a deferral. If I wanted to surrender my policy, I could get the cash value. In some policies, you can take out a loan against the policy, borrowing up to a certain percentage of the value. Talk to your advisor and see what’s available to you.”  

What to know when buying someone else’s life insurance policy

The process of buying a life insurance policy that belongs to someone else is pretty much the same as if you were buying one for yourself. Obviously, the person from whom you want to buy the policy has to be willing to sell it to you. But if you’re both in agreement, your first step is to go to a financial advisor who can facilitate the sale for you.

As mentioned above, legislation in every province except Quebec prohibits the sale of life insurance policies to third parties. But this is merely to prevent the “trafficking” of life insurance policies, which, Murray explains, is when a person or a company specializes in “buying multiple policies, securitizing them and then reselling them” for commercial purposes—usually for terms that aren’t in the policyholder’s best interest.

You can, however, sell your policy to virtually anyone, so long as both parties are consenting. “A parent might sell their policy to their children, or one spouse to another. A businessperson might sell to their partner,” says Murray.

A financial advisor will review the policy, plus the policyholder’s financial situation and reasons for wanting to sell, and then recommend how to proceed. The advisor may suggest another course of action if it nets a better result for the policyholder. “The advisor’s job is to interact with the insurer on behalf of their client,” says Murray. “They may have alternatives to selling the policy, depending on what’s driving the client to want to divest the policy to somebody else in the first place.”

What to know before selling or buying a life insurance policy

There are multiple reasons why someone may want to sell or buy a life insurance policy, and the context in which it’s being sold varies from person to person. For these reasons, Murray says, there are no one-size-fits-all answers as to how you should prepare yourself, or which questions you need to ask. This is why it’s crucial to involve a reputable financial advisor to guide you through the transaction. You may also wish to hire a lawyer to review your contract.   

That said, Murray stresses one important point that’s applicable to everyone: Although selling your life insurance policy carries no surrender fee (although you likely will have to pay “a nominal charge to register the change of ownership”), there are “very complicated tax implications to selling your policy.

“Basically, selling a life insurance policy is a taxable disposition,” she continues. “So, the person selling the policy would have to include some or all [of the proceeds from the sale] as income for the year. It doesn’t matter if you’re selling to a third party or to someone in your family. That’s why it’s important to explore all your options.”

How to buy a life insurance policy

If the buying a policy from someone else work out, you can buy your own life insurance either from an agent at an insurance company or from an independent broker (not tied to a particular company). Life insurance in Canada is well regulated, and rates tend to be competitive from company to company, so the offers you find should be fairly consistent. (Many insurers offer an online estimator that gives a general idea of what you can expect to pay.) Ask family and friends whom you trust if they can recommend a company or broker. 

You have two types of life insurance to choose from:

• Term life insurance is for a predetermined period of time. There is no payout at the end of the term; you simply renew the policy or, if you choose, purchase a different one. The cost of premiums is likely to increase when you renew, to reflect advanced age or any health issues that have emerged since you bought your last policy.
• Permanent life insurance is exactly that: it covers you for life (unless you cancel it). The cost of premiums never changes, and the policy accrues some cash value over time that you can either access while you’re alive or leave to your loved ones.

Of the two, term life insurance is less expensive and the more popular choice. You can find out more about different types of life insurance by reading other articles on this site.