If Daniel Kahan gets his way, he’ll be able to move the headquarters of Ontario Life Line, his Toronto, Ont.-based life loan (settlements) business, to Halifax, N.S. without a regulatory hitch.The only roadblock in his way is potential interference from the Financial Services Commission of Ontario. On June 25, the commission sent a formal letter to Kahan, the founder of Atlantic Life Line, on whether or not his “informational” website is trafficking or trading in life insurance policies in Ontario.
Due to the ethical or moral questions surrounding life settlements and viatical transactions, both have been prohibited under section 115 of the Ontario Insurance Act, which states “any person, other than an insurer or its duly authorized agent, … who trafficks or trades in life insurance policies for the purpose of procuring the sale…is guilty of an offence.”
A life settlement is a transaction whereby a policyholder sells his or her existing life insurance policy to a third party for more than its cash surrender value, but less than the net death benefit. Similarly, a viatical settlement is one where a policyholder, who is terminally or chronically ill, sells his or her life insurance policy to a third party.
Rather than fight FSCO, Kahan is working on moving the headquarters of the Life-Funding website to Halifax, N.S., one of the few provinces that does not prohibit life settlement or viatical transactions. Life settlements are also not prohibited in Quebec, Saskatchewan and New Brunswick.
Part of the reason for the dis-harmonization of life settlement regulation across the provinces is the moral or ethics of the practice. While Ontario allows an individual to transfer a life policy to another individual, it prohibits businesses from making it their primary line of business.
FSCO Warns Against Trafficking in Life Insurance
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.
Andrew Rickard
Typically vulnerable
“While trafficking in life insurance settlements may provide a financial service to individuals who may be facing financial difficulties – by providing short-term financial liquidity in exchange for the rights to a longer-term asset – the individuals involved are typically in a vulnerable financial situation, thus making it important to put in place an adequate consumer protection regulatory structure,” according to a statement by the Ontario Ministry of Finance.
Meanwhile, in Nova Scotia, the provincial regulator has decided it is the consumer’s choice as to whether or not a life settlement is best for his or her estate.
“We do not permit these transactions, but we do not prohibit them either,” says Douglas Murphy, director of Financial Institutions for Nova Scotia. “We believe that our residents should have choice over the management of their financial affairs.”
On the Life-Funding website, Kahan facilitates life settlement transactions in the form of loans. Policyholders can apply for The E-CLIPTM Plan, which allows them to receive a loan in the form of a series of cash payments that (on average) could total 70% of the death benefit of their life insurance policy, which can be paid directly to them or their home care provider. The cash provided to clients is in the form of a loan and thus, does not count as taxable income, which could impact government benefits such as Old Age Security (OAS) or Guaranteed Income Supplement (GIS).
To keep his business ethical, Kahan states policy holders eligible for the E-ClipTM Plan must meet three major requirements: be at least 70 years or older, have an in-force policy and have a policy size of $200,000 or more. In addition, any other loans or encumbrances must be paid off.
“Policy holders being at least 70 years or older ensures that there is an equal proposition for us as the life loan provider on a non-recourse basis, and them as the beneficiary of the loan,” he says.
Met with FSCO
After receiving the initial inquiry from FSCO on June 25, Kahan has met with FSCO twice and has agreed to several operational changes. Firstly, he will employ a full-time person to operate the Ontario Life Line office, as well as obtain a local 902 area code phone number for his business. Currently on the life-funding.com website, there is only a contact form but no contact information.
“Once we have some local funding in place I will be able to achieve these changes,” says Kahan. “Funding has been a challenge, but I believe that financial institutions are turning around and starting to see the benefits of this business.”
In addition, he also plans to use the funding to change the name of Ontario Life Line to Atlantic Life Line Ltd. and get the business’s loan documents registered with the Service Nova Scotia and Municipal Relations’ Consumer Awareness department. This should help the firm become an ‘Authorized Agent’, and enable insurers and managing general agencies to offer the E-ClipTM Plan to advisors.
“By registering our life loan products with an MGA, advisors will have full access,” Kahan adds. “This is a large untapped market.”
According to a 2013 brochure released by the Orlando, Fla.-based Life Insurance Settlement Association (LISA) entitled, “A Life: Free Market + Innovation,” approximately 90% of the policies in the U.S. lapse or are surrendered for a cash value far below the premiums that were paid into them. Projecting this number to Canada, Leonard Goodman, author of “Why Are Canadian Seniors Worth More Dead Than Alive?”, states that seniors north of the border are losing about $1 million per day on life insurance they are unable to transfer to a third party buyer.
As for operating in Ontario, Kahan is working with FSCO to find a solution to continue some operations inside the province. By becoming an ‘Authorized Agent’ of various insurers, Canadian Life Line Ltd., the parent company of Ontario Life Line, can act on an insurer’s behalf (with or without its funding) to offer Life Funding loans directly to their policyholders, with the full co-operation of their life agents.
While most insurers do not permit advisors to participate in these transactions because of Ontario’s section 115 and other reasons, they do cooperate when a policyholder requests they facilitate a transfer of ownership to a third party.
“If the transfer happens after the policy is in place then Sun Life would record the transfer. It never opines or comments on the validity of any transfer to a third party,” says Frank Switzer, vice-president of Corporate Communications with Sun Life Financial.
Editor’s note: See the feature article Viatical settlements stage comeback to insurers’ chagrin to find out why insurers, such as Sun Life and Canada Life, are adamantly opposed to advisors’ involvement in viatical and life settlement transactions.
Ontario’s section 115
In terms of amending section 115 in Ontario to permit life settlements, Goodman says “it takes the stroke of a pen.”
According to the same statement by the Ontario Ministry of Finance, the government has no plans to eliminate restrictions on section 115 at this time.
Regardless if regulation gets amended in Ontario, Goodman insists that advisors still have a fiduciary duty to make clients aware of their options for retrieving value out of their life insurance policies (term and permanent).
“Millions of seniors are locked in to an asset (insurance policy) with lots of value and can’t access the value,” says Goodman. “Advisors have the duty to inform their clients they have options.”
Kahan incorporated Canadian Life Line in Nova Scotia in 1995 to provide viatical loans across the country. In 1996, the corporation applied for an exemption from section 115 in the Ontario Insurance Act but it has yet to be received.
