Life settlements are an established and proven asset class around the world (e.g., United States, UK, Europe), but they are not available to the majority of Canadian seniors.
A few facts
- $7 million a day is paid to seniors in life settlements in the USA.
- U.S. policy owners received $5.62 billion more than the policy cash surrender values from life settlements from 2006-2009.
- Life settlement transactions will average approximately $3 billion per year over the next decade in the US.
- It is estimated to be a $140 billion industry in the US in 2015.
- A study of 9,002 policies by the London School of Business found, on average, a life settlement transaction produced a cash value of more than four times that of the cash surrender value provided by insurance companies.
- In Canada, just four Canadian provinces (Que. NS, NB, Sask) do not prevent life settlements, and it is estimated that there can be a $40 billion industry in these provinces, alone. In all of Canada, the industry could well exceed a $100 billion.
- Eight US states recently introduced Medicaid Life Settlement legislation to enable and encourage people to sell their life insurance policies to pay for long-term care or homecare without compromising their ability to qualify for Medicaid.
- Life settlements are different and should not be co-mingled or confused with viaticals and stranger originated life insurance (STOLI). The insurance companies have, for decades, co-mingled these terms and yet, they are different.
- Warren Buffett has hundreds of millions invested in life settlements.
- Life settlements are ‘among the most highly-rated investments available,’ as ranked by Franklin Templeton, ‘ … in the same league as government bonds.’”
Life settlements are not some new, high-risk venture; they are a proven business model that brings together societal, economic, investment and government interests for the benefit of everyone.
The life insurance industry is a large segment of the Canadian economy and, in many ways, supportive of the society it serves; however, its current business model does not adequately address the changing needs and growing problems. By extension, FSCO, which oversees the insurance industry, must assess its own business model in view of the socio-economic changes, which are changing faster than the monolithic life insurance industry.
Current situation
The need for life settlements is irrefutable and the benefits well established in jurisdictions around the world and if the Financial Services Commission of Ontario (FSCO) had taken appropriate action 15 years ago Ontario would be in a better place today. In 2000, the Red Tape Reduction Act, Schedule G, allowed for changing Section 115 of the Ontario Insurance Act, which currently prevents life settlements. Since 2000, it has been FSCO’s responsibility to promulgate this change, which it has not done.
- Ontario seniors are being denied access to money that is rightfully theirs.
- 21 million Canadians own life insurance and 54% of seniors own a policy.
- Canadian life insurance companies have opposed and obstructed the establishment of a well-regulated, life settlement industry and misrepresented the facts.
- 80% of all insurance policies lapse or are cancelled, which annually amounts to an estimated $6.5 billion not going to policyholders or their families in Canada.
- In the Ontario Insurance Act, under FSCO’s mandate, Section 115 has been on the books for over 80 years and it was recommended for repeal 15 years ago and yet FSCO has not promulgated the change.
- 90% plus of seniors are unaware that their life insurance policy may have considerably more value than its cash surrender value from the insurer.
- The need for additional financial resources for our aging population and the ever-increasing government costs for healthcare has never been more important.
The difference between life settlements, “viaticals” and “STOLI?”
Often the term life settlement is co-mingled – and confused – with these but they are different. We have briefly described the terminology here.
Life settlement:
A life settlement is different from a viatical settlement in that the individual insured on the policy has a longer life expectancy. It is similar to a viatical in that a life settlement pertains to the sale of an unneeded in force life insurance policy for an amount that is more than the policy’s cash surrender value but less than its death benefit. In a life settlement transaction, the policy owner is usually at least 65 and not terminally or chronically ill. The individual sells the policy to a third party and the third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies.
Viatical (from the Latin “Viaticum”, from via meaning “way”):
A viatical settlement typically is used for a settlement involving an insured who is terminally or chronically ill and pertains to the sale of a policy owner’s life policy to a third party for more than its cash surrender value but less than its net death benefit. The sale provides the policy owner with a lump sum payment. The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies. In a viatical settlement, the life expectancy of the insured is generally 24 months or less. As medical advancements have made progress in the lives of those living with AIDS and other life-threatening illnesses, viatical settlements have become less common.
STOLI (stranger originated life insurance):
STOLI generally means that at or prior to the issuance of a policy an arrangement is made to initiate a life insurance policy for the intended benefit of a person who, at the time of policy origination, does not have an insurable benefit in the life of the insured. The main characteristic of a STOLI transaction is that the insurance is purchased solely as an investment vehicle rather than for the benefit of the policy owner’s beneficiaries. This is quite different from a life settlement.
LISAC does not support viaticals or STOLIs.
The need
The financial struggle of seniors is well documented and their plight is destined to get worse before it gets better. According to a recent CIBC report, future generations can also expect to face a “steep decline in living standards … and see a 30-per-cent decline in their standard of living upon retirement.” The author of the report, CIBC deputy chief economist Benjamin Tal said, “That’s why the time to act is now.”
Life settlements should be a part of the ongoing response to the growing financial crisis of our aging population.
- Ontario, Canada’s most populated province has a projected population of over 13.6 million in 2015 with 15.6% being over age 65 (2.1 million), and by 2036, the number of Ontario seniors aged 65 and over is projected to reach 4.1 million.
- Currently there are 5.6 million seniors in Canada and in ten years there will be over 8 million, and 900,000 will be over the age of 85.
- A decade from now, one-third of Canadian households will be in retirement.
- Of all age groups, seniors are the most likely to have unsecured debts.
- The increase in debt among seniors was the biggest year-over-year of all age groups in the second quarter of 2013, at 6.5%.
- 56% of pre-retired boomers consider their current level of debt an obstacle to achieving their retirement goals.
- Canadians age 60 and over hold, on average, total unsecured debts of more than $69,000 each, and almost half of that debt is credit card debt.
- In 2010, 1.3 million Canadians (3.9%) were 80 years or over and the 85 plus group will nearly double in the next ten years from 500,000 in 2006 to about 900,000. Add to this the fact that the average poverty rate for people over age 65 increased two percentage points in just three years (2007-2010) and as of 2014, it had jumped from 6% to 12%.
- 600,000 seniors live in poverty.
- Another 600,000 seniors are still in the workforce.
- Research by Sun Life shows that more Canadian seniors are depending on the equity in their homes in retirement, which means they are going further in debt.
- 38% of Canadians between ages of 35 and 54 had the highest levels of stress and anxiety and said they feared they would run out of money in their old age.
- Rising insolvency is indicating stresses in the financial stability of boomer households. A growing number of seniors are finding themselves faced with the prospect of declaring bankruptcy.
- Health professionals are “now treating personal debt as a public health problem … on a par with addictions such as obesity, poverty and substance abuse”.
- Most workers – a whopping 76 percent – have no pension plan at all, and that number has been steadily rising for years.
- Only 24 per cent of eligible tax filers contributed to an RRSP in 2011, depositing less than five per cent of what they were allowed to contribute. In 2011, just over six million Canadians belonged to a registered pension plan.
- Healthcare costs currently absorb about 11 percent of Canada’s gross domestic product and almost half of provincial budgets; however by 2056, seniors will comprise between 25% and 30% of the Canadian population, placing unsustainable burdens on existing healthcare programs.
- Long-term care funding for boomers over the next three decades will have a shortfall of about $590 billion or roughly $54,000 for each baby boomer in Canada.
- “Arguably, healthcare is approaching a sustainability tipping point.”
- Financial planners and advisors within the life insurance industry need to provide better service and advice to clients, particularly seniors, when it comes to life settlements. In the USA, they have a fiduciary responsibility to advise clients about life settlements and they should be doing the same in Ontario. If they are not fully informed about life settlements and not discussing them with clients then they are performing a disservice to their clients.
Tipping point
In Ontario, by 2017, seniors will account for a larger share of population than children under 15, which is a critical demographic shift that the Government of Ontario in its analysis of “emerging trends” should consider relative to seniors who own life insurance.
In her book, Economorphics: The Trends Turning Today Into Tomorrow (2014), Linda Nazareth looks at economics, demographics and trends that are shaping the future, not unlike the prescience of David Foot’s Boom, Bust and Echo and John Naisbitt’s Megatrends. These findings have made a valuable contribution to long-term planning, and Nazareth states that the “demographic window” is closing fast in Canada. When the percentage of the population under age 15 is below 30% and the percentage over age 65 is below 15 % economically the nation is in balance. However, today, we have a seismic shift in that balance. Nazareth says, “In North America the demographic window is still open, but only just: It opened in 1970 and will shut by 2015.” She adds, “The demographic circumstances that created many of our positive economic outcomes are disappearing. The new demographics will create an economic situation that is very different – unless policies are put in place to offset the adjustment.
To put it mildly, government purse strings will be affected by aging. More people will be looking for pensions, and fewer people (again, relatively speaking) will be paying taxes.”
Based on Nazareth’s analysis, we are at a tipping point. For example, with Ontario’s senior population going beyond the 15% “balance” that she warns of – heading to 23% – it is a convergence of costs and time with little relief in sight. We are getting older and poorer, faster.
In a February 21, 2015 column in Globe and Mail, Financial freedom is just $4.5 million away, Ian McGugan put a price tag on financial freedom in Canada, which he based on the annual median income for a Canadian family of $74,000 after-tax [i.e., unsecured debt of $69,000 (p.16) equals a year’s income]. He stated that freedom would cost, roughly $4.5 million. This compares to $1.4 million twenty years ago. As McGugan said, “there is no cheap route to freedom.” In fact, for most, there is no route at all. And $4.5 million is a mountain that many seniors and many in the economically stagnating middle class will never climb.
The assumption that if people just save more then everything will work out is a fallacy. How long can we work? How much can we save, even with a Tax Free Savings Account (TFSA)? And how can you contribute more to RRSPs if you have less?
As a 2012, BMO Retirement Institute Report stated: “At a time when it is expected that individuals will have accumulated sufficient assets to carry themselves throughout their retirement years, the increase in the bankruptcy rate of Canada’s aging population is of concern … Boomer’s retirement security is in severe jeopardy.”
The perfect storm is forming on the near horizon
Our public sector leaders know the numbers and see the problem. A 2012 survey by the Institute of Public Administration of Canada (IPAC), found that 63% of public sector leaders saw the economic situation as the most important public policy priorities, with healthcare, aging population … a distinct second tier.
Governments are well aware of the mounting financial pressures and demographic changes and there are countless initiatives in search of solutions and yet, something as practical and efficacious as life settlements has been prevented, in large part, by FSCO’s encumbering structure and lack of capability.