Ontario's provincial insurance regulator is warning consumers against viaticals, life settlements, and Stranger-Owned Life Insurance (STOLI) schemes.
In a warning issued on September 12, the Financial Services Commission of Ontario (FSCO) described the selling or transferring of life insurance policies as "a controversial practice" and warned consumers that, depending on the circumstances, the transaction may not be legal in Ontario.
"Any person, other than an insurer or its duly authorized agent, who solicits or assists Ontario policyholders in the selling, trading, transferring, pledging or assignment of life insurance policies might be in violation of section 115 of the Insurance Act," says FSCO.
In the warning notice, FSCO defines a viatical or a life settlement as "the transfer or sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit". In these cases, FSCO says that a third party (usually an investor) maintains the policy and changes the beneficiary designation in order to receive the proceeds at death. In STOLI arrangements, an investor who has no insurable interest in the insured encourages someone to take out a life policy in exchange for a payment of a loan. The insured transfers his or her right to receive the death benefit to this third party, who pays the premiums and eventually collects the insurance.
"Consumers considering such transactions should proceed with caution. Life insurance agents considering advising policyholders on such transactions should undertake the appropriate due diligence. Such policies may not be valid because the third party that actually initiated the policy has no insurable interest in the life of the insured person. In addition, the insured may be giving up the benefits of obtaining and owning a life insurance policy in the future. There is a maximum amount of aggregate coverage insurance companies are willing to issue to any individual," warns FSCO.
"STOLI transactions are designed to maximize profits for all participants, so insureds are often encouraged to procure the largest policy possible irrespective of the insured's future insurance needs. In doing so, the consumer uses up his/her insurability,” continues FSCO. “Uninformed or ill-informed participants may unwittingly sacrifice these rights and ruin any chance of obtaining needed life insurance after they participate in a STOLI transaction."
FSCO says people who have been asked to participate in these kinds of ventures should contact their insurance companies to discuss the implications. The Ontario regulator also warns that consumers will not be protected under the Insurance Act if they do business with agents or insurers that are not licensed in the province.
