Before suggesting the replacement or reduction of a policy or of a pending application, representatives must take the client's current and future needs into consideration, along with their objectives and financial situation. It is the representative's responsibility to disclose all the information needed so that the client has a good understanding of the product you are recommending and the impact of the proposed replacement on the original policy. Your objective is to ensure that the client's needs are met and that the client's best interests come foremost.
Representatives must provide clients with a written explanation of the advantages and disadvantages of replacing an existing life insurance policy, before starting an application for a new policy. When reviewing the written explanation, clients have the opportunity to ask questions that will help determine if replacing an existing policy is in their best interest.
In Quebec, a Prior notice of replacement form with all applicable areas completed, signed by both the policy owner and the representative, provides the proof the representative compared the features of the current policy and the proposed policy, as well as proof of the client's understanding of the transaction.
The client's current situation needs to be analysed when preparing the written explanation. The analysis of both the existing policy and the proposed insurance policy should include a review of:
- the type (term, whole life, or universal life) of both the existing and proposed insurance policies
- the suicide, contestable period, and contractual exclusions on both policies
- the amounts the new policy will pay (death benefit, cash value, dividends)
- cash value, loans, dividends, etc in the existing policy
- any benefits or attached plans that may be lost
- contractual cancellation charges that will be applied
- guarantees on both policies
- premium increases and premium guarantees
Other points that should be considered are:
- the client's current health and whether or not a rating may be applied to the proposed policy
- taxable policy gain when the existing policy is cancelled
- preferential tax treatment on some older policies that may be lost
If the representative is aware that a client's existing policy may lapse or has lapsed, the benefits of keeping the policy in force or reinstating the policy must be discussed. The representative must try to ensure that all insurance contracts are maintained in effect, unless the replacement of the policy is justified as being in the interest of the purchaser or the insured; the representative who replaces the contract must demonstrate that the replacement is justified.
Quebec specific - Financial needs analysis (FNA)
At the time of any sale of insurance and before suggesting the replacement of an existing policy, the representative must complete a FNA of the insured or the policyholder. If the FNA suggests the client would be best served by replacing an existing policy, the representative must demonstrate in writing that the replacement is in the client's best interest by completing a Prior notice of replacement (“Prior notice”). In order to do so, the representative must gather all the facts, which means that the client's existing policies must be available for analysis and comparison purposes. The advisor must explain the proposal to the client and ensure that the client has a clear understanding of the situation.
- Two forms, supplied by the Autorité des marchés financiers are available for replacements:
- Prior notice of replacement of life insurance policy;
- Prior notice of replacement of an individual disability insurance policy.
- If you are a trainee, the replacement must be authorized by your training supervisor and the Prior notice must be countersigned by the latter.
- The prior notice must in all cases be signed on the same day as the application for life insurance.
- Where a replaced product is not the same type as that offered, the representative must complete a notice of replacement answering the following three (3) questions and give it to the client:
- How does the current contract fail to meet the client's needs?
- How will the proposed product better meet the client's needs?
- What disadvantages will the replacement involve for the client?
- A copy of the completed form must be sent to the head offices of the insurer(s) who issued the contract(s) likely to be cancelled, by any means within five (5) working days, providing proof of the date of signing of the insurance proposal.
- Make a photocopy of the Prior notice of replacement for your record.