Chapter 4- Ethics

Confidentiality

Ethics requires this. Personal information about a client should never be released without prior approval from the client.

An insurance producer represents whom?

His or her insurance company to the general public and prospective insureds.

In Florida, what is an agent required to deliver to the applicant?

In Florida, an agent is required to deliver to the applicant a Life Insurance Buyer's Guide and a Policy Summary. These documents are usually delivered before the agent accepts the applicant's initial premium.

Rebating

Occurs if the buyer of an insurance policy receives any part of the producer commission or anything else of significant value as an inducement to purchase a policy.

Accountant

The accountant determines the accounting and tax implications and procedures.

Twisting

Twisting also is referred to as external replacement. It involves illegally inducing a person to drop existing insurance to buy similar coverage with another producer or company.

Replacement

an action which eliminates the original policy or diminishes its benefits or values. Examples of this are policy loans, taking reduced paid-up insurance or withdrawing dividends. Therefore, the producer who recommends that a client borrow cash value from an existing policy to pay premiums on a new policy may be engaging in replacement just as much as the producer who encourages a client to drop one policy and replace it with another.

full disclosure

informing the prospect or client of all facts involving a specific policy or plan so that an informed decision can be made

Conditional contract

one contingent upon conditions that existed at the time of application or when a medical examination is completed.

Points to Ponder If You're Considering Replacing Your Life Insurance

1) Changes in health and age. The risk always exists that the client has become uninsurable or insurable only at a higher rate. Even if the client's health is sound, a whole life policy purchased at age 20 almost always carries a lower premium than one purchased at age 48. 2) New contestable period. A company's right to challenge a death claim or other information, usually within two years from the date of policy issue, may expose the client to the risk of dying without coverage or may subject beneficiaries to legal conflicts. 3) New policy fees and expenses. 4) Possible loss of policy upgrades or automatic improvements that may meet the policyowner's objectives. 5) Loss of Grandfathered Rights.

conditional receipt

Given to the policyowners when they pay a premium at time of application. Such receipts bind the insurance company if the risk is approved as applied for, subject to any other conditions stated on the receipt.

The conditional contract provides that the applicant is covered immediately from the date of application, as long as what?

as long as he or she passes the insurer's underwriting requirements.

What two responsibilities does the producer have when some policies are rated or rejected?

1) He or she should personally review the rating or rejection. Ex: Was it medical? Was there an unfavorable medical report? Was something overlooked or not made known to the underwriter? Should additional information be submitted? Is the rating or rejection proper? Should the application be reconsidered? In any event, the producer should have as much information as possible and be able to explain the rating or rejection to the applicant. 2)Assuming the rating or rejection was valid, the producer has the responsibility to notify the applicant promptly. Ex: To withhold this information in an effort to prevent the applicant from seeking insurance elsewhere is a breach of ethics and could actually harm the applicant and his or her family.

There are two principles that form the foundation for an, effective sales presentation, what are they?

1) Its purpose is to uncover the needs of the prospect and eventually show how life insurance satisfies those needs. 2) The function of the life insurance producer is to help people solve financial problems.

The following two steps can help producers use their knowledge to benefit clients and themselves:

1) Learn the products and the industry. 2) Plan sales presentations carefully.

To avoid inappropriate replacement, producers should do the following:

1) Maintain Close Contact with Clients 2) Educate Clients about How the Policies They Purchase Suit Their Needs 3) Ask Clients to Call if they've ever asked to consider replacing

Before Recommending a Replacement. When it appears that replacement may be in a client's best interests, a producer should conduct a rigorous series of tests. Following are some of the steps involved:

1) Make sure the replacement is legal according to state regulations. If the replacement fails to meet state law, discontinue all replacement activities. Note that even when the replacement is not illegal, this does not necessarily mean that it is appropriate 2) Conduct a self-check to ensure that the replacement is ethical. 3) Give the client a form called a Notice Regarding Replacement, which provides up-to-date information about the client's existing coverage so he or she can compare it with the new, proposed policy. 4) Provide the client with a completed and signed comparison statement that fairly and accurately allows the client to compare the two policies. 5) Notify the existing carrier of the proposed replacement. Where external replacement is involved, this enables the policyowner to meet with the original selling producer. Where internal replacement is involved, this also enables the company to ensure that all internal replacement rules are being met. 6) Make full and fair disclosure of all facts concerning the new coverage and the existing insurance. Policyownerswho consider replacement should be aware of how changing coverage will affect cash values, incontestability provisions and other features of their existing policies. 7) Give a follow-up letter to the client that summarizes the meeting with the producer, including what they talked about regarding replacement, what the product recommended and what the client decided. 8) Complete all other appropriate forms properly. By signing these forms, the insured acknowledges that he or she is fully aware of which benefits are being given up and which benefits are being accepted when he or she purchases the new coverage.

Some of the most common examples of misrepresentation follow:

1) Misrepresenting a policy's provisions or benefits or how the policy can be expected to perform over time. 2) Overstating promises and guarantees. 3) Giving the impression that policy dividends or cash value projections (other than those that are, in fact, guaranteed, as stated in the policy) are guaranteed. 4) Using inaccurate or misleading information or numbers that misrepresent the financial condition of an insurance company, a broker-dealer or another producer. 5) Making any statements or giving reassurances of any kind about coverage, the policy or premiums that are not true or that cannot be supported clearly by the policy. 6) Engaging in the most serious type of misrepresentation-intentional fraud.

When a Replacement May Be Appropriate:

1) The client's health has improved. 2) A female client originally was underwritten with unisex rates in compliance with the laws of her state.When she moves to another state, one that allows sex-based rates, it may be possible that a new policy will reduce her coverage cost. 3) A policy that was issued at a young age and features a small death benefit for an inappropriately large premium no longer meets the client's needs. 4) The purpose of the replacement is to undo a bad replacement.

Generally policy replacement results from one of two possible motives:

1) The producer genuinely may believe canceling one policy (or reducing its values) to replace it with another benefits the client. Ex: This can occur when an existing policy appears to be completely inappropriate or no longer meets the client needs, such as in a divorce or the death of beneficiaries. 2) The second motive-the one that has resulted in investigations into the abuse of replacements-is the result of a producer's desire to generate new first-year commissions without regard to the client's needs.

In Florida, rebating is allowed if the agent adheres to the following rules:

1) The rebate has to be available to all insureds in the same actuarial class. 2) The rebate must be in accordance with a rebating schedule filed by the agent with the insurer issuing the policy to which the rebate applies. 3) The rebating schedule must be uniformly applied so that all insureds who purchase the same policy through that producer for the same amount of insurance receive the same rebate percentage. 4) Rebates should not be given to an insured who purchases a policy from an insurer that prohibits its producers from rebating commissions. 5) The rebate schedule must be prominently displayed in public view at the producer's place of business and a free copy made available to insureds on request. 6) The age, sex, place of residence, race, nationality, ethnic origin, marital status, occupation or location of the risk cannot be used in determining the percentage of the rebate or whether a rebate will be available.

Principles and Code of Ethical Market Conduct

1) To conduct business according to high standards of honesty and fairness and to render that service to its customers which, in the same circumstances, it would apply to or demand for itself. This principle eliminates double standards and encourages the two most essential standards of ethical sales: honesty and fairness. 2) To provide competent and customer-focused sales and service. 3) To engage in active and fair competition. This principle obviously seeks to limit (unnecessary) replacement and defamation. 4) To provide advertising and sales materials that are clear as to purpose and honest and fair as to content 5) To provide for fair and expeditious handling of customer complaints and disputes 6) To maintain a system of supervision and review that is reasonably designed to achieve compliance with these Principles of Ethical Market Conduct.

These areas, which often are fairly complex in nature and difficult to explain, include the following:

1) Vanishing Premiums. 2) Flexible Premiums 3) Insurance Presented as a Savings or Retirement Plan 4) Guaranteed versus Potential Cash Value Accumulations 5) Dividend Misrepresentation 6) Insurance Described as Investments 7) Premiums Referred to as Other Than Premiums 8) Failure to Distinguish between Tax-Free and Tax-Deferred Accumulations 9) Failure to Divulge Risks 10) Failure to Explain Product Differences

What does service mean in an ethical context?

1) educating the client before, during and after the sale, ensuring that he or she fully understands the application and underwriting processes, the policy purchased and any attached rider; 2) treating all information with confidentiality; 3) disclosing all information so that the policyowner or applicant can make an informed decision; 4) keeping the prospect or client informed of any rejection, exclusion or cancellation of coverage; and 5) showing loyalty to prospects and clients.

According to the surveys' results, the top ethical concerns producers have can be broadly categorized into three areas:

1) skills and competence issues 2) obligations associated with a commitment to-or lack of-professionalism; and 3) moral issues stemming from individual behavior.

The organized sales presentation proceeds according to six steps:

1) the approach; 2) establishing the general problem; 3) establishing the specific problem; 4) assessing the need; 5) presenting the life insurance solution; and 6) the close.

Improper replacement is divided into two categories:

1) twisting 2) churning

Deceptive Sales Presentations

A deceptive sale is any presentation that gives the prospect or client the wrong impression about any aspect of an insurance policy or plan, that does not provide complete disclosure, or that includes any misleading or inconclusive product comparisons.

skill and competence issues

A knowledgeable, competent producer would not fail to identify a prospect's needs nor would he or she have to misrepresent his or her capabilities.These qualities are the means by which an insurance producer provides informed options and recommendations that are in the client's best interest. Therefore a producer has the ethical responsibility to: 1) Develop and maintain a high level of knowledge and skill through concentrated study and dedicated work. 2) Acknowledge those cases or situations that are beyond his or her skill level.

professional obligation issues

A lack of professionalism can lead to disparaging the competition, not being objective with others in business dealings, failing to provide prompt and honest answers to clients' questions, and failing to provide products and services of the highest quality in the eyes of the customers. Professionalism requires a producer to: 1) Place the client's interest beyond one's self-interest. 2) Be dedicated to his or her industry and supportive of all its member companies and representatives. 3) Offer quality plans and represent quality companies.

What Constitutes a Misrepresentation?

A misrepresentation can be a verbal statement, a brochure or policy illustration that has been altered or some other written communication with a prospect or client

Selling to Fit Needs

A prime violation of a producer's ethical duty to a prospect is deliberately selling to fit the needs of the producer rather than the needs of the prospect. The typical result is a prospect being sold insurance with the highest premium (and the greatest commission) instead of the proper coverage.

Complete and Honest Representation

A producer has a duty to present each policy with complete honesty and objectivity. This means pointing out any limitations or drawbacks the product may have, along with its features and benefits.

Communication Issues

A prospect's lack of understanding of what benefits an insurance policy will and will not provide is usually the result of poor communication. Sometimes the source of this problem is that a producer attempts to sell a new product without fully understanding the policy's features and benefits. Attempting to sell a new policy, or any policy, without adequate knowledge and training is unethical because it is a producer's responsibility to determine if and how a policy will fit the prospect's needs.

What if you're not an agent, can you solicit?

An individual employed by a life or health insurer as an officer or other salaried representative may solicit and effect contracts of life insurance or annuities or contracts of health insurance, without being licensed as an agent, only when he or she is accompanied by, and solicits for and on the behalf of, a licensed and appointed agent.

What does solicitation of insurance mean?

Any person to purchase an insurance product by: 1) describing the benefits or terms of insurance coverage, including premiums or rates of return; 2) inviting prospective purchasers to enter a contract for an insurance product; 3) making general or specific recommendations concerning insurance products; 4) completing orders or applications for insurance products; or 5) comparing insurance products, advising on insurance matters, or interpreting policies or coverages.

When in Doubt...

As a rule, producers should avoid replacement unless it is obviously so appropriate that they cannot in good conscience think it best to leave an existing policy in force.

Churning

Churning also is known as internal replacement. It involves replacing policies within the same company, often by the same producer who sold the original policies.

What is another ethical responsibility the producer owes the clinet?

Explaining the underwriting process that the application will undergo

What does the law require individuals who solicit insurance to have?

Florida law requires any individual who solicits insurance to hold a valid license issued by the Department of Financial Services. Then, the licensed individual must be properly appointed by an insurer or employer to transact insurance or adjust claims on behalf of the insurer or employer.

What does full disclosure also mean?

Full disclosure also means discussing a policy's limitations openly. Most consumers welcome being given the complete picture as candidly as possible A simple way to help explain today's more complex products is to describe their features and benefits. The producer can identify the feature clearly, then explain it in terms of its benefits. The producer should also be sure to note possible limitations of a particular feature.

Attorney

The attorney drafts the documents necessary to accomplish the client's objectives and advises the client of any legal consequences

appointment

The authorization or certification of an agent to act for or represent an insurance company.

A producer's primary responsibility in the application process is to whom?

The insurer

Vanishing Premium

The vanishing premium concept allows for a policyowner to make cash payments to a point at which future dividend and other cash values may be sufficient to pay all future premiums

Moral Issues

These problems are (1) false or misleading representations of products or services and (2) the temptation that exists between opportunities for financial gain (or other personal benefit) and the proper performance of their responsibilities. Thus, the ethical producer: 1) Learns very early the difference between right and wrong in the business practices and acts accordingly. 2) Consistently adheres to his or her values and maintains this integrity throughout his or her sales career. 3) Willingly assumes the obligation to perform his or her duties in a way that reflects the highest degree of dignity on the industry and best serves the interests of the client or prospect.