Can I transfer my life insurance policy?

Navigating the ins and outs of buying life insurance is a feat in itself, but what happens when you need to change or transfer your life insurance policy? The answer is not always clear, so we’ve set out to answer some of the most common questions about transferring, changing, and selling life insurance policies in Canada.

Can I transfer my life insurance policy to another company?

In general, it is not possible to transfer a life insurance policy from one insurance provider to another. This is because of the underwriting involved in the approval process as well as factors that can affect the cost of life insurance over time, such as age and health conditions. In other words, the factors that made you eligible for the original life insurance policy may no longer apply. 

While transferring a policy between companies isn’t an option, policyholders can opt to change their policy altogether or obtain multiple life insurance policies if needed. 

There are potential benefits to changing your life insurance policy and provider. For example, if your health has improved significantly since the original application or your life insurance policy has renewed after its original term, you could qualify for cheaper life insurance premiums. 

Opting for a different type of insurance, such as term life over permanent life insurance, can also lead to savings down the line. On the other hand, there are hurdles to changing your coverage, such as higher premiums associated with age or, in some cases, even being uninsurable.

Another thing to consider when switching life insurance providers is that you will have to restart the incontestability clause built into some contracts: essentially a period during which the death benefit can be contested for any misrepresentation of material information. There is of course less reason to be concerned if you are sharing all relevant lifestyle and medical information accurately.

Similarly, when you start a new coverage, the suicide exclusion clauses restart as well. This clause (built into almost all life insurance policies in Canada) usually states that the benefit will not be payable if the cause of death within the first two years is from self-inflicted harm. (Read more about how suicide affects life insurance.)

Your insurance company may however transfer your coverage to another company. In cases where an insurance company goes bankrupt or gets acquired by another provider, the company that issued the policy and the one that pays it out or renews your coverage may be different. 

Can I transfer my work benefits life insurance policy to an independently owned policy?

While many employers offer their employees basic life insurance as part of work benefit programs, this type of life insurance does not continue when an employee quits or loses their job. In cases where an employee is simply changing to another job with group benefits that include life insurance, this is not an issue. 

In other circumstances, some work benefit policies do enable the insured to switch to an individual term policy or convert to an individual permanent life policy (where you continue coverage without having to requalify with medical underwriting) for a limited death benefit and at an elevated cost. Once the policy is switched or converted to the individual, however, premiums are typically more expensive than they were under the group terms.

For this reason, many people supplement their work benefits life insurance with their own policy. This solves many of the challenges associated with employer-provided life insurance, including not enough coverage for spouses or dependents and its reliance on maintaining the full-time position.

Can I transfer my life insurance death benefit to someone else?

The short answer to whether you can transfer a life insurance death benefit to a different person is yes. But there are different ways of proceeding depending on whether the beneficiary is revocable or irrevocable, a common distinction made for couples’ life insurance. 

In the case of a revocable beneficiary, the policyholder has the ability to change the beneficiary without their express consent. In the case of an irrevocable beneficiary, the policyholder needs to obtain the beneficiary’s signature to make any policy changes. 

It is advisable to keep the beneficiary as revocable to give the policy owner maximum control over the policy. However, in some cases, you may be required to keep the beneficiary type as irrevocable. This could happen because you choose to or in many cases because a judge has ordered you to do so. Many divorce settlements or judgements will require a partner to hold life insurance to cover alimony or education costs for kids in case of their death. Read more about life insurance and divorce.

Can I transfer my life insurance ownership to someone else?

It is technically possible to transfer your policy to a different individual or owner during your lifetime.

However, there may be some tax considerations involved depending on what type of policy is being transferred and whether it is transferred to a related party (such as a family member) or an unrelated party (such as a corporation or a charitable organization). 

While it’s desirable to avoid life insurance transfers and the related tax consequences entirely, it’s not always possible to foresee how and when personal relationships and business circumstances may evolve.

These are a few of the scenarios in which the transfer of a policy may be intended or become necessary, as family or business relationships change: 

• From parents/grandparents to a child
• Between spouses/common-law partners
• Transfer of a policy to a sibling (usually on the life of a parent)
• From and to your corporation 
• To a charitable organization

Generally speaking, when you transfer ownership of any capital asset to a third party, it is treated as a disposition and may lead to taxable capital gains. Similarly, a transfer of a policy’s ownership is also typically treated as a taxable disposition of the policy and can lead to a taxable gain. In the case of life insurance, however, such taxable policy gain is treated as part of income for the transferring policy owner. Policy gains cannot be offset against capital losses.

When a policy has to be transferred, the tax implications are calculated based on the difference between the greatest of the Fair Market Value ( FMV) of the consideration received (if any), the Cash Surrender Value (CSV) on that date, and the Adjusted Cost Base (ACB) of the policy. 

Thus, if the deemed value of the policy exceeds the ACB, the extra amount may be considered as income and hence become fully taxable. 

There are some exceptions that allow for a tax-free rollover of a policy with no immediate consequences.

These exceptions happen when such transfers are:

• Between living spouses or common-law partners who are Canadian residents
• Transfer to a child, who is also the insured and for no consideration 
• When there is no cash surrender value (for example, with the transfer of a term life insurance policy) and no associated consideration is paid

When you transfer policy ownership, the tax consequences can be different and significant, based on your unique circumstances. Speaking to an advisor and/or a tax consultant will help you make the right decision.

Can a life insurance policy be transferred after death?

When a person dies, the assets left behind are first transferred to an estate and then transferred to the claimant of the estate. This disposition of a policy results in a gain being evaluated that has to be paid in the final income returned for the deceased. Therefore it is important to appoint a contingent policy owner that meets the tax-free rollover requirements in order to secure a tax-efficient transfer upon death of the insured.

Can I sell my life insurance policy to someone else?

Though selling life insurance policies is common practice in the United States, its application remains complex within Canada. In certain provinces (Quebec and New Brunswick) it is legal to sell your life insurance policy to a third party through what is called a life settlement or viatical settlement. In most provinces, life insurance sales for a viatical settlement are prohibited. In Ontario, it is not legal, despite ongoing attempts to change the law and some insurance providers outright prohibit the practice, regardless of its legality.

Where it is legal, a life settlement consists of selling a permanent life insurance policy to a third party for a greater sum than the policy’s cash surrender value but less than the full death benefit. Essentially, the original policyholder is paid a lump sum for the policy, while the new owner continues to pay the premiums and is entitled to the full benefit when the original policyholder dies.

There are a number of reasons one might want to sell their life insurance policy. For instance, an elderly person whose retirement fund is running low may wish to stop paying monthly premiums and receive a lump sum of money to continue paying for housing, care, or anything else their budget needs at that time. 

In places where life settlements are not permitted, the option would either be to surrender the policy for cash, take out a policy loan, or transfer the policy, although each of these options may have tax implications which you should discuss with your tax advisor.