Foresters Insurance | Life insurance premium financed by an external lender

ForestersTM is issuing this advisory to address a concern within the industry and by regulators about life insurance premiums being financed by external lenders who have no insurable interest whatsoever with the insured.

The selling or transferring of life insurance policies is often referred to as viatical settlements, life settlements or “stranger-owned” life insurance. It can also be known under different names such as life collateral loans, premium financed loans or non-recourse premium financing and other names might develop.

Any person other than an insurer or its duly authorized agent who solicits or assists a policyholder or member in the selling, trading, transferring, pledging or assignment of life insurance policies can be a violation of the provincial insurance regulations.

“Stranger-owned” life insurance involves arranging a life insurance policy with the intent to transfer the right to receive a death benefit to a third party, usually an investor. Typically a life insurance policy is initiated for the benefit of a third party investor who has no insurable interest in the insured person’s life. The insured is induced to take out the insurance policy for an immediate payment or loan. The investor then pays the premiums and later collects the death benefit or assigns it to other investors.

“Stranger-owned” life insurance transactions are designed to maximize profits so insureds are often encouraged to procure the largest policy possible irrespective of the insured’s future insurance needs.

Foresters will not accept policies where the third party that initiated the policy has no insurable interest in the life of the insured person.

In addition, in many Canadian provinces it is illegal to traffic life insurance policies.

While applications involving bank assignments will generally be acceptable, Foresters may not accept an application for life insurance in other situations if the objective is for the policyholder or member to sell or assign the policy or certificate to an unrelated third party.

Using insurance as an investment vehicle by a third party who has no real insurable interest constitutes a practice that we consider unhealthy for the industry.

Our employees will be diligent in identifying proposed sales that are not consistent with the applicant’s insurance requirements or Foresters underwriting standards.

Thank you for your effort in making certain every application contains complete and accurate information and your clients are aware of the negative consequences of selling or lending a life insurance policy or certificate.