If you are no longer able to afford term life insurance premiums, you might be wondering: “Can I sell it to a third-party?” The short answer is yes, but there are conditions.
Not all life insurer companies in Canada may allow policy holders to sell their life insurance policies, and third-parties usually buy policies from older individuals.
Also, if you have a term life plan, you will likely have to convert it into a permanent policy before you can sell it.
What is a term life insurance policy?
A term life insurance policy is a legal contract between you and the insurer. The insurance company promises to pay your beneficiary the death benefit in return for monthly premiums. All term life policies last for a fixed term, which can be anywhere between one to 35 years. Your loved ones receive the payout only when you die within the policy term. If you outlive the policy term, neither you nor your beneficiary receives any payment.
Term life insurance, unlike whole life insurance, does not accumulate cash value. That is why it is the purest form of life insurance. It has only purpose: to provide financial assistance to your family upon your death. Because term life insurance is 10 to 15 times more affordable than whole life insurance and much simpler to understand, it is usually the right option for most people.
Most term life plans have guaranteed level premiums and death benefit. That means your premium rate and the death benefit does not change throughout the policy term. But if you choose to renew your policy at the end of the policy term, your premium rate will go up. However, this increase is only due to age, not health or other factors.
Generally, term life insurance policies include the guaranteed insurability rider and the term conversion rider. But if your plan does not have either or both, adding them may be worth the cost. The guaranteed insurability rider protects your right to renew coverage without any medical underwriting. The term conversion rider, on the other hand, allows you to convert your term life policy into a permanent life plan up to a certain age without submitting proof of good health. The term conversion rider could prove handy if you later decide to sell your term life insurance policy.
Can you sell your term life insurance policy?
Like many things, the answer is, it depends. Not all provinces or life insurance companies in Canada allow policyholders to sell their personal life insurance policies. Also, selling a term life insurance policy may be harder than selling a permanent life insurance plan. That is because in the case of term life insurance, there is no guarantee that the beneficiary will receive the death benefit. The insurer issues the payout only when the insured passes away during the policy term. If you sell a whole life policy, you will likely receive an amount that is more than the policy’s cash surrender value but less than the death benefit.
Having said that, you may be able to sell your term life insurance policy in the following two scenarios:
- You have converted your term life plan into a permanent life policy — whole life insurance or universal life insurance.
- You have a terminal illness and are not expected to live long.
Selling a life insurance policy to a third party for cash is known as a life settlement or a viatical settlement. The third party pays the remaining premiums and receives the life insurance proceeds upon your death.
Generally, permanent life insurance policies are much easier to sell than term life plans. If you want to sell your term life policy, you will probably need to first convert it into permanent life insurance. The conversion is only possible if your plan has the conversion rider and the rider is still valid. Many term life policies include the term conversion provision by default, but you can also add it for a small additional fee. Keep in mind that the conversion rider comes with an expiry date and your new premium rate will be much higher, athough you will not have to prove insurability again.
If your term life plan does not include the conversion provision or it has expired, then you will likely be unable to sell it. The only exception is if you have a shortened life expectancy due to a terminal illness. In that case, you may still qualify for a life settlement.
Things to consider before selling your term life insurance policy:
Selling your term life insurance policy may make sense if you can no longer afford to pay the premiums or are seriously ill and need money for end-of-life care. Whatever the reason, a life settlement is a big decision, and you should go ahead with it only after you have considered the following things:
You will need to switch to permanent life insurance first
Unless you have a shortened life expectancy, you will need to convert to a permanent life policy to qualify for a life settlement. Read your term life insurance policy document carefully to find out whether it includes the conversion provision and whether it is still valid.
If your policy does not have the conversion rider, there is not much you can do. You cannot change the terms of your contract later. If the conversion provision is part of the contract and has yet not expired, contact your insurer. Depending on your insurer, you may be given the option of whole life insurance or universal life insurance or both. You will not have to undergo a medical examination again, but the new premium rate will be significantly higher.
Not all provinces or life insurers in Canada allow life settlements
Selling a personal life insurance policy is not legal in all provinces. For instance, while Quebec and Saskatchewan allow life settlements, Ontario does not allow its residents to sell their policy to a third party. Also, not all life insurance companies let policyholders sell their life insurance. A case in point is Sunlife insurance, which does not allow life settlements, regardless of their province of residence.
Your age and health impact life settlement offers
Several factors affect your settlement offers, but the two most important ones are your age and health. Younger and healthier people receive low returns from a life settlement, if they qualify for it at all. Most buyers tend to buy a life insurance policy from people aged 65 or older.
Find a reputable broker
Finding buyers for your policy on your own may not be easy. After all, a life insurance policy is not something you can list on eBay. But neither should you hire the first broker you come across. The commission rate varies greatly among brokers and can be as high as 30% to 40% of the purchase price or as low as 10% to 15%. Therefore, it is worth taking your time to interview several brokers.
Whether you go solo or hire a broker for a life settlement, try to get as many quotes as possible. That is the only way to ensure you are selling the policy at the best possible price.
The sale is taxable
While life insurance proceeds are generally not taxable, the payment received through a life settlement usually is.
Alternatives to selling your term life insurance policy
If you are no longer able to afford life insurance premiums, a life settlement may seem an appealing option, but it is not the only one you should consider. Here are several, less complicated alternatives to selling your term life insurance policy.
- Request the insurer to reduce the coverage amount: Your insurer may be willing to lower the coverage amount if you can no longer afford to maintain the current level of coverage.
- Cancel the policy: If your term life insurance policy is relatively new, it might be better to just let it lapse.
- Use the accelerated benefit rider: Many term life policies include the accelerated benefit rider by default, but you can also add it by paying a small additional fee. The accelerated benefit rider allows the insured to access a portion of the death benefit — usually anywhere between 25% and 95% of it — if they have been diagnosed with terminal illness. The payout can help them pay for end-of-life care. Using the accelerated benefit rider might be a better option than a life settlement if you have a shortened life span and need access to cash.
A life settlement may be a good option for some people if they can no longer afford the cost of insurance or need access to cash. No matter whether your policy is term or permanent, you can sell it to a third party, as long as the province you live in and the insurer from whom you bought the policy allow it.
While it is easier and less complicated to sell a permanent life insurance policy than a term life insurance policy, you can sell a term life plan by first converting it to a whole or universal life insurance policy.
If that is not possible, you may not qualify for a life settlement. The only exception to this rule is if you are terminally ill.
Get in touch with Dundas Life to find out if you can sell your term life policy and to get the best offers.