Life insurance is an important financial tool that many Canadians rely on to protect their loved ones in case of unexpected events. However, life circumstances can change, and sometimes the need for a life insurance policy may evolve. In such cases, individuals may wonder if they have the option to sell their life insurance policies in Canada.
If you are someone who is planning to sell their term life insurance in Canada, but not sure if it is possible, continue reading. This blog aims to explore the concept of selling a life insurance policy in Canada, the potential benefits, the process involved, and the factors to consider before making such a decision.
The Need to Sell a Term Life Insurance Policy
There can be various reasons why you might need to consider selling your life insurance policy in Canada:
- Changing Financial Needs: Over time, your financial situation may change, and you may find that the original purpose of your life insurance policy no longer aligns with your current needs.
- Premium Affordability: Premium payments for life insurance policies can be substantial. If you're struggling to keep up with premium payments, selling the policy might be a viable option.
- Retirement Planning: As you approach retirement, you might have enough assets and savings to cover your financial needs, making your life insurance policy less critical.
- Estate Planning: Your estate planning objectives may change, and you want to use the proceeds from selling your policy to fund other aspects of your estate plan.
Also Read: How does Life Insurance works in Canada?
Can you Sell Your Term Life Insurance Policy in Canada?
The answer to this question is yes but with conditions applied. Selling term life insurance in Canada is a practice that hinges on several factors and is not universally applicable. The ability to sell your term life insurance policy largely depends on the province you reside in and the policies of your specific insurance provider. Unlike permanent life insurance plans, term life insurance policies are generally less sought after by life settlement providers due to their temporary nature.
One of the critical distinctions between term and permanent life insurance lies in the payout mechanism. Term policies only issue a death benefit if the insured individual passes away during the policy's term, and there is no guarantee that the beneficiary will receive this benefit. This factor makes selling term life insurance more complex.
However, there are scenarios in which you may be able to sell your term life insurance policy in Canada:
- Conversion to Permanent Life Insurance
If you've converted your term life plan into a permanent life policy, such as whole life or universal life insurance, you may have an opportunity to sell it. This is possible only if you have added a conversion rider to your term life insurance. Having a conversion rider allows you to switch to a permanent plan. It's essential to note that the conversion rider often has an expiration date, and your premium rates are likely to increase, although you won't have to prove insurability again.
- Terminal Illness
Another circumstance where selling a term life insurance policy may be possible is if you are diagnosed with a terminal illness and are not expected to live long. In such cases, you may still qualify for a life settlement or viatical settlement. These transactions involve selling your life insurance policy to a third party, who pays the remaining premiums and ultimately receives the insurance proceeds upon your passing.
Also Read: Life Insurance for Non-Residents in Canada
Selling Your Term Life Insurance Policy in Canada
In Canada, the option to sell your life insurance policy is known as a "life settlement" or a "viatical settlement." You sell your existing life insurance policy to a third party and get the cash payment.
Here's how the process generally works:
- Eligibility: Not all life insurance policies are eligible for sale. Thus, it is highly imperative to consult an expert life insurance provider to understand the selling process and its consequences.
- Evaluation: A life settlement provider assesses your policy's value based on factors like your age, health, policy type, premium payments, and the policy's cash surrender value.
- Offers: Once evaluated, you'll receive offers from potential buyers, such as investors or financial institutions, who are interested in purchasing your policy.
- Legal Requirements: In Canada, life settlements are subject to provincial regulations. It's essential to comply with the laws in your province when selling a life insurance policy.
Note: The cash payment on selling the insurance is primarily tax-free for most policy-holders.
Factors to Consider Before Selling Your Term Life Insurance
If you're considering selling your term life insurance policy in Canada, it's essential to be aware of several key factors that can significantly impact your decision and the outcome of the sale. Here are some important considerations to keep in mind:
- Conversion to Permanent Life Insurance
If you decide to sell your term life insurance policy, you will first need to convert it into a permanent life insurance policy, such as whole life or universal life insurance. Permanent policies offer coverage for your entire life and often include a cash value component that can grow over time.
- Not Available in all Provinces
The option to sell your life insurance policy is not uniform across all provinces in Canada, and not all life insurance companies permit it. Regulations regarding life settlements vary by province, and some provinces may have stricter rules or limitations on the practice. Additionally, not all life insurers include a conversion option in their term policies, making it important to check with your insurance provider to determine if you have the option to convert your policy to a permanent one and explore whether life settlements are permitted in your area.
- Consider the Tax on selling
It's crucial to be aware that the proceeds from selling your life insurance policy in Canada may have tax implications. The amount you receive from the sale is considered taxable income, and you may be required to pay income tax on that amount. The tax implications can vary depending on factors such as your age, the policy's face value, and the total premiums paid. Consult a tax professional to understand the tax consequences of selling your policy and how it fits into your overall tax strategy.
- Financial Assessment:
Evaluate your current financial situation and future needs to ensure that selling the policy aligns with your overall financial plan. Understand the value of your policy and compare offers from different settlement providers to get the best deal.
- Impact on Beneficiaries
Selling your policy means your beneficiaries will no longer receive a death benefit. Consider how this might affect your loved one's financial well-being.
Benefits of Selling a Life Insurance Policy
Selling a life insurance policy can have several advantages:
- Access to Funds: Selling your policy provides you with a lump-sum payment that you can use for immediate financial needs, such as medical expenses, debt reduction, or retirement.
- Relief from Premiums: You'll no longer be responsible for paying the ongoing premiums on the policy, which can free up your budget.
- Flexible Use of Funds: The proceeds from selling your policy can be used for any purpose, allowing you to address your current financial priorities.
Want to Sell Your Term Life Insurance? Consult with Experts At Life Simple
Selling a term life insurance policy in Canada is a viable option for individuals whose circumstances have changed and who no longer require the coverage provided by the policy. However, it's crucial to carefully consider the financial implications, explore available options, and consult with professionals to make an informed decision that aligns with your unique situation and goals.
At Life Simple, our team of experts is here to help you navigate the intricacies of your policy and make informed choices about your financial future. Reach out to us today for a consultation and make the best decision for your unique situation
Whether you choose to keep your policy or sell it, the key is to ensure that your financial strategy continues to provide the protection and security you and your loved ones need.