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.  

Recently the Health and Human Services Office of Inspector General issued a report A-17-17-52000-  U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES MET MANY REQUIREMENTS OF THE IMPROPER PAYMENTS INFORMATION ACT OF 2002 BUT DID NOT FULLY COMPLY FOR FISCAL YEAR 2016.

In the report, OIG recommends that HHS focus on the root causes of the improper payment rate percentage and evaluate critical and feasible action steps to decrease the improper payment rate percentage below 10%.  Advanced statistical systems, marketed under the name of “predictive modeling” don’t address any root causes.  Their value is picking up patterns of existing frauds.  Now, there is a bill in Congress which may go a long way to responding to this longstanding need.

HR 4554, the Medicare Common Access Card Act of 2017, directs CMS to initiate pilot programs to test smart cards for prevention, detection and deterrence of Medicare fraud.  In 2016, the GAO published GAO-16-216 HEALTH CARE FRAUD Information on Most Common Schemes and the Likely Effect of Smart Cards to report to Congress whether smart card technology can affect the root causes of frauds.  The answer is yes.

Criminal activity of all kinds thrives in the dark.  Because healthcare claims are basically paid without any verification that the services were ever rendered.  Payers do not know where they were rendered if the patient was at the office on the day the claim says they were- even that the provider of services was in the country on that day.  Media stories often document the “25-hour day” where legitimate provider billings would require that long a working day based on the procedures billed in the claims paid.  This root cause is a fundamental enabler of fraud in Medicare, Medicaid and private insurance fraud.  Capturing vital data at the point of care with multiple points of authentication, such as included in HR4554, would provide CMS and other payers the ability to shed light on the times, locations and actions that truly occur in provider offices, home care, and transportation claims, and reduce the ease with which many frauds are committed.

The GAO report estimated that smart cards can attack 22% of fraud.  We at Castlestone don’t completely agree their methodology, which included civil settlements against pharmaceutical companies in the universe of frauds measured.  Even so, using the way we implemented a smart card anti-fraud solution, the costs are about 1% of the 22% fraud number computed by the GAO.  Fraud in Medicare and Medicaid alone is estimated to be $120-$150 Million per year.

This is not the first time that the Medicare Common Access Card has been submitted to Congress.  Representative Peter Roskam of Illinois has diligently tried to get this passed in at least 3 previous sessions of Congress, and in the US Senate, the FAST Act and PRIME Act, led by former Senator Tom Coburn of Oklahoma, could not get enough votes in Congress.

Given that Medicare and Medicaid now cost over $1 Trillion per year (yes, with a “T”), which is $400 billion more than it was 10 years ago when we started developing our smart card solution to Medicare and Medicaid fraud, it begs the question why this hasn’t been done years ago.

Along with technologies like those proposed in HR4554, policies that encourage increased spending and Federal reimbursement, and discourage fraud prevention and reduction must be reversed.  This combination will ensure that taxpayers are getting the healthcare they pay for.

Jeff Leston, CEO Castlestone LLC.

Castlestone is a US company created to use the infrastructure of the payment (credit/debit) networks to deliver verified,  real-time information about time, location and details of healthcare encounters without having to invest in large networks.  Castlestone’s primary customer base are health plans looking to prevent, detect and deter fraud and abuse.

There are some lessons for Canada in this so the Monitor Telegram is republishing this article. 

BY JUNE YEE – REPUBLISHED WITH THE PERMISSION OF THE CANADIAN ASSOCIATION FOR RETIRED PERSONS (CARP)

[This article was provided to the Monitor Telegram by Daniel Kahan]

The costs of caregiving bear out the fact that growing old can carry real financial burdens. Recent innovations in the financial services industry underline concerns about paying these costs. Critical illness insurance and long-term care insurance as well as a more recent innovation, the so-called “nursing care” annuity, are touted as ways to lessen the financial stress of aging.

But these products aren’t available to everyone. “What happens to people who are going to a nursing home today? It’s not going to help them to buy a long-term care policy. Somebody who’s got cancer or needs a bypass – they can’t buy a critical illness policy,” says Daniel Kahan, an actuary in Toronto and a staunch supporter of viatical settlements.

Accessing life insurance equity
Viatical [editor: .  viatical – describing the purchase of an insurance policy from a holder who is terminally ill} arrangements represent an income alternative that’s rooted in insurance but dramatically different from our traditional perception of life insurance. In a viatical settlement (the term viatical is rooted in the Latin viaticum, referring to supplies or money for a journey), the policyholder sells the death benefits of the life insurance policy 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 gets 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.

“Somebody who is 80 years old and has been paying their premiums for 20 years needs to go into a nursing home. Eventually, when they die, their estate gets the money, but they need the money now.” says Kahan. “Why not allow a mechanism where they can convert that equity into cash with an income stream?”

Kahan had hoped changes to the Ontario Insurance Act in December 2000 as part of that province’s Red Tape Reduction Act would allow viatical business. But nervous politicians nixed the new rules at the last minute, saying that viaticals wouldn’t be allowed until proper regulations were in place. In July 2001, the Financial Services Commission of Ontario (FSCO) issued draft regulations, asking for comments.

Opponents of viatical settlements cite widespread fraud in the United States, where viatical settlements are a booming business, as a reason for caution – or not at all (see “Fraud Cuts Both Ways,” [editor’s note: not available online]). Proponents of viaticals, however, say fears are unfounded and that it’s unfair to refuse policyholders, some needy, the right to sell their policies.

Currently, third-party trade in insurance policies continues to be prohibited in all provinces and territories except Nova Scotia, New Brunswick, Saskatchewan and Quebec. In the provinces where they are legal, lack of regulation means a lack of protection.

The key issue in the draft regulations is how to control the abuses that have characterized the U.S. viatical industry to date. Among the key questions are: who should be allowed to conduct business in viatical settlements; should viatical settlements be limited to only the terminally ill; how long a life expectancy should be stipulated as a condition of viaticating a policy (draft rules call for a two-year limit); and, not least, just who will regulate the industry.

Interested parties are watching Ontario these days. The bulk of life insurance policies in Canada reside in this province, and regulations governing viaticals are on the drawing board.

Seniors a prime market
Where viatical settlement business is legal, seniors are a growth area. The so-called “senior settlements” business, which has little to do with being terminally ill but everything to do with being old, has sprung up as a niche within the viatical industry. It’s a sound business concept, according to Victor Lansdown, who operates Life Source and Associates Inc., a Montreal company that buys life insurance policies. “It [the insurance policy] is a time-valued instrument. The healthy seniors, all they have against them is their age.” In other words, the older you are, the shorter your life expectancy, and the more you can expect to get when you sell your policy. “Seldom are we able to assist a person with a life expectancy of 12 years, for example. The majority would be 10 years [or less].”

Why the Canadian insurance industry is wary

For its part, the Canadian insurance industry largely opposes viatical settlements, claiming that living benefits, otherwise known as accelerated benefits, in which policyholders with life expectancy of less than two years may obtain an advance of death benefits, already fill the need. Living benefits originated as a compassionate response to the AIDS epidemic of the early ’80s, which saw many terminally ill patients facing staggering drug costs with no way to pay.

There are potential problems with this, however. Although living benefits are offered by most insurers, they are essentially a voluntary guideline, rather than part of any insurance contract. Also, living benefits are usually limited to 12 to 24 months prior to expected death.

“We’re not so much opposed to consumers getting their money. We had major concerns with the fraud associated with the viatical product,” says Andrew Casey, vice-president, legislative, of the Canadian Life and Health Insurance Association (CLHIA). “It was an industry that was rife with fraud and deception.”

Indeed, viatical transactions recently ranked sixth in BusinessWeek’s list of the most prevalent investment frauds in the U.S. Meanwhile, the Canadian Securities Administrators describes viatical settlements as “very risky investments and often fraudulent.” Casey also insists our superior health-care system means a weaker case for viatical settlements in Canada than in the U.S.

Tax implications
There are other technical issues. Casey notes concerns about the tax implications of viaticating a policy. “If your policy is paid out by the company, there’s a tax-free aspect. But once you viaticate it, you’ve sold that policy and that’s taxable.” This income could also affect pension benefits (for example, boosting a pensioner’s income past the threshold for clawback of Old Age Security).

One solution put forward by CAIFA, the Canadian Association of Insurance and Financial Advisors, in its response to FSCO’s consultation draft for viatical settlements in Ontario, is to set up the viatical settlement as a loan. “Among [the benefits to the viator, or person selling the policy] is the ability to avoid tax liability and to pay to a beneficiary any part of the death benefit that remains after repayment of the loan and interest.”

Kahan’s vision goes further – to a not-for-profit organization run by the provincial government to facilitate viatical settlements for the needy. A settlement would take the form of loans made against the security of collateral assignment of the policy. He points out the Ontario Ministry of Health has examined and pretty well established the feasibility of establishing a non-profit viatical organization in Ontario.

Unfortunately, this study seems to have been largely ignored in the current discussions. Says Kahan, “If the government were really interested, they could do it themselves.”

Fraud cuts both ways
The U.S. experience with viatical settlements shows regulators grappling with fraud; not only are insurance applicants participating in the crooked schemes, they’re being helped or encouraged by insurance agents and brokers eager for more policies to be available to investors, according to http://www.crimes-of-persuasion.com. The website, which serves as a fraud watchdog of sorts for consumers, lists two of the more common viatical investment schemes as:

• Clean-sheeting, in which a life insurance applicant fails to disclose a pre-existing medical condition in response to a question on a life insurance application. Because medical exams can be forgone, this ensures the policy will be issued and can then be sold.
  • Wet-ink policies, in which the insured sells their policy or multiple policies from different insurance companies, sometimes within weeks, while there’s little chance of finding out they’re terminally ill.

© August 2004 50Plus Magazine