Investment companies that specialize in buying up life insurance policies are picking up steam. Targeting policy holders who are retired or in declining health, the viatical market raises ethical qualms for insurers. They are forbidding their advisors to act as intermediaries in these transactions.Quebec, New Brunswick and Saskatchewan allow the trading of life insurance policies’ benefits. Other provinces, notably Ontario, ban this practice. Viatical settlements, also known as life settlements, give the policy holder a percentage of the insurance face amount, which rises as life expectancy decreases (the current scale varies from 40% to 80%). The purchasing company becomes the beneficiary and owner of the policy. It pays the premiums and receives a return on this transaction when the insured person dies. The sooner the insured’s demise, the higher the buyer’s return, which rings several ethical alarm bells for insurers.
Institutional investors offer life settlements in Canada – even where technically forbidden – through funds that hold policies issued in the United States (see sidebar Mainly an American market. Examples include Crown Alliance Capital and MaxLife Fund Corp., present in Ontario. In provinces more open to life settlements, firms like Quebec-based Prosperity Life deal directly with policy holders and their advisors. The firm claims on its website to be a federal company registered in Montreal, which represents investors who are willing to buy life insurance policies.
Prosperity Life does not provide a physical address or a contact name, only a telephone number and an e-mail address. Its website mentions that the company targets Quebec policy holders over age 82, who hold a universal policy with an insurance amount that has reached at least $250,000. It offers life settlements directly to the insured person or through advisors whom it also recruits on the site. The company can answer questions in both languages, but its site is in English only.
Although almost unknown to the public, these firms are better known in the distribution network. “We have observed a resurgence of this type of demand among our advisors, but this interest has been tapering off,” says Anny Plamondon, life insurance and advanced marketing director at Quebec MGA Groupe Cloutier. Plamondon says that this decrease in interest is the result of Groupe Cloutier’s efforts to explain to advisors that insurers are uncomfortable with viatical settlements.
Aequum Life Settlements is one of the names that advisors mention when asked about firms active in Quebec, Plamondon adds. Aequmm is a subsidiary of LifeCapital Group (LifeCap), a Montreal firm that claims that it has been serving this market in Canada for 60 years. Aequum targets insured ages 65 and up. It seeks policies and policy holders eligible for LifeCap’s offer and negotiates a purchase price.
In an interview with The Insurance and Investment Journal, Daniel Kahan compares this market to an auction system. Founder of Elder-Care Life Funding and the website lifecarefunding.com, Kahan says he acts as an intermediary to facilitate transactions between policy holders and investors. As an actuarial consultant, he tries to get the best value for his clients’ policies, he says.
Kahan offers his services to policy holders aged 70 and up, with policies for a minimum insurance amount of $200,000. He aims to provide elderly policy holders with an amount that is staggered over time, enabling them to finance their healthcare. It’s like a reverse mortgage, except the equity is the life policy not the house, he says.
For Kahan, this market is perfectly legitimate, born out of compassion. It was dubbed viatical settlement at a time when AIDS almost always meant a death sentence, and there were no approved drugs to effectively combat this devastating disease. He does not see any ethical problems with these activities when done responsibly
Insurers, in contrast, have a strongly opposed view. A written notice on Manulife Financial’s advisor website specifically prohibits advisors from signing “viatical agreements” or life settlements. Advisors may not carry out activities related in any way to viatical settlements, regardless of their registration or permit.
The penalty is quick to follow. “If we catch an advisor doing this, we cancel their contract,” Guy Couture, Manulife’s regional vice-president, Retail Markets in Montreal said in an interview with The Insurance and Investment Journal. He explains that this infringement includes situations where advisors decide out of compassion to directly buy the policy of an elderly client who wants to stop paying premiums.
Canada Life, whose business development is largely driven by the independent advisor network, issued an equally strong warning. In its advisor code of conduct the insurer says that it will neither support nor condone the creation or sale of viatical or life settlements. “Under no circumstances are you to engage in any activity, including trafficking or trading of life insurance policies, related in any way to viatical or life settlements.”
Diane Grégoire, spokesperson for Canada Life and other insurance subsidiaries of Great West Lifeco, confirmed to The Insurance and Investment Journal that Great-West and London Life share Canada Life’s stance. “If we find an advisor has not maintained the ethical and business standards of our company or industry, we take immediate and appropriate action, which can include termination of the advisor’s contract,” she says.
Sun Life Financial adamantly insists that advisors must refrain from viatical and life settlements. “These transactions are not permitted at Sun Life Financial, regardless of the province in which the transaction takes place. Advisors must not be involved in the trading of these policies. This applies to all provinces, without exception,” reads the memo first published in 2012.
Sun Life representative Geneviève Jutras says that the insurer put this ban in place to avoid risks associated with the practice, like misappropriation (of funds) or abuse of vulnerable people, and conflicts of interest when advisors are involved. The insurer is also bothered by seeing trading based on people’s lifespans. What’s more, tax problems could arise in certain situations.
Couture says the practice is more common than people think. “It’s a huge market in the United States. According to my compliance department, American companies have launched a major marketing campaign recently in Canada, and especially Quebec. An MGA told me last fall that the phenomenon is growing in Quebec. He was fielding two requests from advisors per week on this topic. I warn advisors not to engage in these practices. They could face negative consequences from the Autorité des marchés financiers (Quebec’s financial markets regulator) and the tax authorities.”
There are two common operating modes, Couture continues. Either advisors encourage the transaction, or investor groups buy policies directly. “If an American company comes to buy a policy here, we cancel the contract of the advisor who acted as an intermediary and we report that person to the Autorité.” Couture suspects that some advisors successfully slip these transactions by their MGA. “It would then go unnoticed,” he says.
At Groupe Cloutier, Anny Plamondon thinks these transactions are hard to detect, for insurance companies and distributors alike. “These transactions appear as a change of owner. We do not systematically check the reasons behind each of these transactions,” she explains.
Guy Couture questions the ethics of companies that target the elderly, become owners and beneficiaries of their insurance contracts and obtain a better return if they die sooner. “These practices open the door to fraud and to loansharking,” he points out.
Desjardins Insurance is another supplier repelled by this type of transaction. Compliance director Jean-François Morin sees insurable interest as a shield against these practices. “Contract transfers must always be done in favour of a person who has an insurable interest in the life insured, which is verified when the transfer is requested.” He notes that Quebec law is less tolerant of life settlement agreements than people think. “In Quebec, it is illegal to transfer a contract to a third party who has no insurable interest. Articles 2418 and 2419 of the Quebec Civil Code specifically deal with this.”
Article 2418 of the Civil Code stipulates that an individual insurance contract is null if at the time it is signed, the client has no insurable interest in the life or health of the insured, unless the holder has consented in writing. “Subject to the same reservation, the assignment of such a contract is null if the assignee does not have the required interest at the time of the assignment,” the Code states.
Under Article 2419, a person is deemed to have an insurable interest “in his own life and health and in the life and health of his spouse, of his descendants and the descendants of his spouse, or of persons who contribute to his support or education.” The article adds that the person “also has an interest in the life and health of his employees and staff or of persons in whose life and health he has a pecuniary or moral interest.”
However, transfer of property to a charitable organization, which issues a tax receipt to the premium payer, is permitted. Once it acquires the contract, the organization names itself as the beneficiary, and receives the capital when the life insured ends.
Morin points out that insurers also grant advances in the form of compassion benefits.
All the same, Daniel Kahan thinks the life settlement market is more flexible and most often gives clients higher amounts than compassion benefits offered by insurers.
As part of his business, Kahan says that he helps clients obtain the best market value for the policy, which he transfers to a charitable organization. It’s absolutely legal in all provinces and you receive a tax receipt for it, he continues. He does not see why life settlements would be an exception.
Beyond the ethical problems it may raise, this practice skews insurers’ lapse assumptions, which is what irks them most, Kahan contends. Viatical settlements result in fewer people abandoning their policies before death because they no longer have to pay the premiums.
“Insurers don’t want a secondary market. Their opinion is: if you don’t want your policy anymore or cannot afford the premiums, you just have to lapse it or surrender it, but don’t give it to somebody else. They say it’s a dangerous market where people might get ripped off. Assuming we’re dealing with intelligent people advised by their financial planner, they should be able to decide whether to sell their policy or not,” Kahan says.
Anny Plamondon understands insurers’ resistance to life settlements. “They think it is not a good idea to have a contract on the head of a policy holder with an investor group as the beneficiary. All it takes is one regrettable situation for the industry to be lambasted by the media.”
At the same time, she says the existence of a secondary market for an insurance policy reveals a need. “What can the industry do to meet this need? Couldn’t it offer a product or way to let policy holders who need money sell their policies without going through a secondary market?” she questions.