Executive Summary 

Making loans to life insurance policyholders or the selling of life insurance policies by third parties, known as life settlements, are considered to be trafficking in life insurance policies and are prohibited in most Canadian provinces, including Ontario, through provisions in their respective insurance legislation. This spring, however, a Private Member’s bill entitled Insurance Amendment Act (Life Loans) (Bill 20) was introduced by Trillium Party MPP Jack McLaren to the Ontario legislature. Bill 20 will enable third parties to make loans to life insurance policyholders and to charities to which life insurance policies have been donated. The challenge will be to have Bill 20 approved before the Ontario election on June 7, given that Bill 20 will be competing with government legislation. Most would agree that Bill 20 will help Ontario seniors by enabling them to convert their life insurance policies into cash at a time when they are faced with rising expenditures and low-interest rates.

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For almost eighty years, making loans to life insurance policyholders or the selling of life insurance policies by third parties, known as life settlements, has been considered to be trafficking in life insurance policies and is prohibited in most Canadian provinces through provisions in their respective insurance legislation. In Ontario, Section 115 of the Insurance Act prohibits “any person other than a life insurer or its duly authorized agent…from trafficking or trading in life insurance policies.” Because of Section 115, which was introduced in 1933, life insurance policyholders can only “sell” their life policies back to their own life insurer for its cash surrender value or borrow against this cash surrender value from a bank.

This spring, however, a Private Member’s bill entitled Insurance Amendment Act (Life Loans) (Bill 20) was introduced by Trillium Party MPP Jack McLaren to the Ontario legislature. Bill 20 will enable third parties to make loans to life insurance policyholders and to charities to which life insurance policies have been donated. Bill 20 will reverse the prohibition on making loans to life insurance policyholders but not the selling of life insurance policies by third parties in the current Ontario Insurance Act.

It is important to note that there are major differences between life settlements and life loans. Life settlements enable life insurance policyholders to sell the death benefits of their life insurance policies at less than face value to a third party; the buyer-investor keeps up premium payments and is entitled to the full death benefit when the policyholder dies. The policyholder receives cash upfront, and the investor’s return is based on the amount paid for the policy and the time that passes before collecting the death benefit. If the life insured is terminally ill, the life settlement is referred to as a viatical settlement. Loans to life insurance policyholders have several advantages compared to the sale of life insurance policies. In Canada, the proceeds of a life or viatical settlement are taxable whereas the loan proceeds to policyholders are not. With a life settlement, there are no death benefits left for beneficiaries whereas there is with a loan. A life settlement may adversely impact the policyholder’s entitlement to welfare benefits by increasing the policy holder’s income.

Bill 20, which was introduced on March 22 to the Ontario legislative, has several safeguards for life insurance policyholders including a 10 day cooling off period and the regulation of third parties who make or arrange these loans by the Financial Services Commission of Ontario. There is also a requirement for these third parties to advise their clients to seek legal and financial advice before making any decisions. This bill also gives insurance companies the right of first refusal with respect to a life insurance policyholder who wants to take out a loan and use their life insurance policy as collateral.

This initiative will help many people in Ontario, given the province’s aging demographic, greater longevity and low-interest rates. Although this bill is not restricted to seniors, this initiative is expected to benefit mostly seniors and charities owning donated life policies from seniors. Ontario’s senior population is more than 2 million, represents almost 16% of the population and is expected to rise to over 20% in a decade.

Allowing the trading in life insurance policies by third parties has been considered by the Ontario government in the past. A feasibility study sponsored by the AIDS Bureau in the Ontario Ministry of Health in 1997 recommended that people with a life-threatening illness should be able to benefit from their life insurance policies during their lives and receive fair and ethical treatment. The study stated that the Ministry of Health “should urge the Ontario Insurance Commission to mandate insurance companies to comply with the Recommended Practices, and permit, and establish regulations for viatical settlements in Ontario”. In 2001, based on the consultations during Ontario’s Red Tape Review Commission, Ontario passed legislation that would have allowed the sale of life settlements. The Financial Services Commission of Ontario, which regulates insurance companies in Ontario, issued draft viatical settlement regulations and asked for comments. This legislation, however, was repealed in 2011 after deaths from AIDS fell due to the introduction of more effective medications.

In October 2017, a Private Member’s bill entitled Insurance Amendment Act (Life Settlements) (Bill 162) was introduced by Mike Colle, Liberal MPP for Eglinton Lawrence, in the Ontario legislature to legalize life settlements and allow seniors the right to sell their existing life policies (after they had been in force for 3 years) to a third party investor (subject to a ten-day cooling-off period). Bill 162 passed Second Reading in October 2017 and was referred to the Committee of the Whole House. The Ontario Legislature recessed on December 14. In the first few months of 2018, it was made clear that Bill 162 would not move forward because of opposition from the insurance industry. Since being introduced on March 22, Bill 20 has received First Reading in the Ontario Legislature. The next step for Bill 20 is to receive Second Reading and to be referred to Committee. At this stage, these steps are viewed as attainable. The challenge will be for Bill 20 to pass the Committee stage and receive Third Reading, which historically has required more time for most bills. The passage of Bill 20 is also made more difficult by the fact that it is a Private Member’s bill not a government bill and, therefore, is not viewed as a priority by the governing party. Bill 20’s ultimate approval will be a race against time as the provincial election is June 7 and legislation that is not approved before that date will die on the order paper.

Four provinces currently allow third parties to buy life insurance policies and to make loans to life insurance policyholders – Saskatchewan, Quebec, Nova Scotia and New Brunswick. Many countries across the globe have allowed the sale of life settlements for some time – the U.S., Germany, Japan and the U.K. In fact, American life settlement companies are able to advertise in Canada. For example, U.S.-based Coventry Financial Group has numerous ads on Canadian television channels offering to buy life insurance policies from Canadians.

Bill 20 recommends that third parties that make loans to life insurance policyholders be regulated by an existing Ontario financial services regulator — the Financial Services Commission of Ontario (FSCO) as FSCO already regulates the insurance companies (all issues except solvency which is regulated by the federal Office of the Superintendent of Financial Services (OSFI)). When asked about such a role, FSCO has indicated that their mandate is determined by the Ontario Ministry of Finance. To this point in time, the Ontario Minister of Finance has taken a neutral position on Bill 20. The Ontario Minister of Seniors has expressed concerns about safeguards for seniors which appear to be adequately covered given Bill 20’s proposed 10 day cooling off period, the regulation of third parties who make or arrange these loans by the Financial Services Commission of Ontario and the requirement for these third parties to advise their clients to seek legal and financial advice before making any decisions.

Ultimately, the approval of Bill 20 will be a race against time, as all the parties in the Ontario legislature move into election mode. What must be kept in mind by all Ontario MPPs, however, is that Bill 20 will greatly assist Ontario seniors in dealing with financial challenges at a time when the costs of housing, hydro and other basic necessities of life are continuing to rise.

Beverly Brooks, MA, MBA, is President of Brooks Communications. Her company develops and implements investor, media, stakeholder and government relations strategies for private sector companies and associations. Brooks Communications has provided strategic advice to a variety of sectors including financial services, healthcare, energy, mining, information technology and real estate. Beverly has worked for two international communications agencies, a national association and a proxy advisory firm. She also worked as a Senior Economist and as the Director of Consultations for the federal Department of Finance. Beverly is an Advisor to the National Crowdfunding and Fintech  Association of Canada.