Can I sell or transfer my ownership interest in a mutual company?

How it works

Membership in a mutual life insurance company is not a separate piece of property that sits beside your policy. It is a consequence of owning a participating policy issued by that company. The legislation and the company's bylaws attach the membership to the policyowner for as long as the policy is in force. There is no certificate, no share register entry and no price at which the interest could change hands, because the interest is not a share and does not represent a divisible part of the company's capital.

That is why the question of selling or transferring the interest has a short answer. You cannot sell it, give it away, pledge it as security or leave it to someone by itself. When the policy ends, whether it is surrendered, lapses, matures or becomes a claim, the membership that came with it ends too.

What you can deal with instead: the policy

both failures come from one decision

How this goes wrong, named in advance

1. Early surrender, when the costs fall heaviest
2. Lapse while an advance is still outstanding
3. A taxable gain arriving with no cash to pay it
4. Funding a contract the household cannot sustain
5. Drawing on the contract without ever repaying

The policy is property, and the contract and provincial insurance law set out what an owner can do with it. In general terms an owner can change the beneficiary, subject to any irrevocable designation. An owner can assign the policy as collateral for a loan from a lender, which gives the lender a right to be paid from the policy's value or death benefit before anyone else. An owner can transfer ownership of the policy to another person or to a corporation. And an owner can surrender the policy for its cash surrender value.

Where ownership of the policy passes to someone new, the membership follows the policy, because the new owner is now the participating policyowner. That is the only sense in which the interest moves: it goes with the contract, never apart from it, and it is the contract that is being dealt with, not the membership.

The cost or the catch

Dealing with the policy is not free of consequences, and some of them are easy to miss.

A transfer of ownership can be a disposition for income tax purposes. Depending on who receives the policy and on what terms, the transferor may have to report a policy gain, measured by comparing the value received, or the policy's cash surrender value in some related party transfers, with the policy's adjusted cost basis. Transfers between a shareholder and a corporation, and between family members, each follow their own rules. The tax treatment is set by the Income Tax Act, and the conclusion for a particular transfer belongs to a CPA or a tax lawyer, not to this page.

A surrender ends the contract entirely. The owner receives the cash surrender value less any outstanding policy loan, a policy gain may be taxable, and coverage stops. If the insured person's health has changed, replacing the coverage later may cost more or be impossible.

A collateral assignment keeps the policy in force but gives a lender a prior claim on it, so the amount the family receives at death can be reduced by whatever is owed. The assignment also usually restricts what the owner can do with the policy without the lender's consent, including surrendering it or changing the beneficiary.

What happens to the membership at death or on a change of owner

five steps, and you may stop at any of them

From first conversation to a contract in force

1. 01A thirty minute discovery meeting, with no products
2. 02The suitability record a licence requires before advice
3. 03A design meeting, guarantees shown separately
4. 04Application and underwriting, decided by the insurer
5. 05An annual review once the contract is in force

Two situations are often confused. When the insured person dies, the policy becomes a claim and the insurer pays the death benefit to the beneficiary. The contract has ended, so the membership that came with it ends as well. The beneficiary receives money, not a membership, and gains no membership in the company by receiving it.

When the owner of a policy dies and the insured person is someone else, which is common where a parent owns a policy on a child's life or a corporation owns a policy on a shareholder, the policy continues. Ownership passes to a successor owner named in the contract or through the owner's estate, and the membership passes with it to whoever becomes the new owner. Naming a successor owner is therefore a decision about the contract that also settles, as a side effect, who holds the membership next. It is worth confirming with the insurer that the successor owner designation on file says what the family intends, since an estate transfer can take longer and may attract probate fees in some provinces.

Why the interest has no market value

if one is missing the answer is no

Four things required before anything else

1. 01Durable surplus cash flow, in an ordinary year
2. 02A horizon measured in decades rather than years
3. 03A place in the household's wider position
4. 04A clear purpose for the contract itself

A share has value because it is a claim on a company's future earnings and on what would be left if it were wound up, and because others are willing to buy that claim. A mutual membership is neither. The company's surplus is held for the membership as a whole and for the security of every policyholder's guaranteed benefits, not split into personal portions. The member's economic benefit arrives in only two ways: through the contract's guaranteed values, and through the policy dividends the board declares from the participating account. Both belong to the policy. Take the policy away and nothing is left to value.

The one exception history offers

The only time a mutual membership has turned into something that could be sold is when the company demutualized, converting into a stock company under a plan approved under the legislation. At that point eligible policyowners were compensated, in past Canadian conversions typically with shares or cash. Those shares, once issued, could be sold like any other shares. But that is a one time decision taken by the company and its regulators, not a right a member holds, and nothing guarantees that any remaining mutual will ever convert. It is not a reason to buy or keep a policy.

What to ask, and of whom

the cycle a contract is used through

Funding, drawing and repaying

1. 01Premium funds the contract on the agreed schedule
2. 02Value accumulates under the terms of the contract
3. 03The insurer advances against the cash value
4. 04Interest accrues to the insurer while a balance stands
5. 05Repayment restores the capacity that was used

If you are considering transferring or assigning a policy, ask the insurer for its ownership change and assignment forms and for a statement of the policy's cash surrender value and adjusted cost basis. Ask a CPA or a tax lawyer what the transfer would cost in tax before signing anything. Ask the lender, in the case of a collateral assignment, exactly what it can claim and when. The licensed professional who placed the policy can help assemble the documents, but the tax conclusion is not theirs to give.

Who this matters to most, and least

It matters most to an owner planning to move a policy between a corporation and its shareholder, between spouses, or to a child, and to anyone who has been told that a participating policy includes a tradable stake in the insurer. It matters least to an owner who intends to keep the policy for life and simply wants to know what the membership adds, which is a vote and a structure, not an asset.

What this page will not tell you

This page explains why a mutual membership cannot be sold and what an owner can do with the policy itself. It cannot tell you the tax result of a particular transfer, the terms a particular insurer applies to assignments and ownership changes, or whether a transfer suits your circumstances. Those answers belong to the contract, to the insurer, and to a professional advising you on your situation.