As the economic downturn worsens, agents, management and companies must prepare themselves for the increased likelihood of market conduct and compliance issues arising.
There are several reasons for this, including:
–The strain on consumers due to lost jobs and indebtedness can translate into bad financial decision-making related to life insurance and annuities.
–Consumers also may look at their investments in variable products and begin to question their suitability and the advice they were given about the products.
–As insurance and annuity sales weaken, agents leave the business, creating a situation where their clients may not get appropriate advice and service.
–Finally, as the market for life insurance, annuities and mutual funds cools, agents will work harder than ever to make and keep sales and may be tempted to cut some corners, which can lead potential problems.
Client actions that may cause market conduct issues
Economic circumstances can lead clients to cancel or surrender policies or contracts without fully understanding the implications of their actions. There may be tax implications; for instance, if they have loans on their life insurance policies they may face income tax on their surrender. Clients who are younger than 59 1/2 who make withdrawals from annuities may face a potential tax impact on gains. Clients who surrender or cancel policies may also be undermining their future financial security. Canceling a policy can also create legal issues; for example, when life insurance is a requirement for a mortgage or part of a divorce agreement.
Clients may take loans from policies without realizing the impact on the policy’s survivability. Clients may miss payments, which may trigger automatic loans on cash values which undermine the policy, or they may see their policies’ cash values as needed for other expenses. A client may panic at losses in a variable annuity and withdraw his or her investment without realizing there are other investment options available in the product.
Agents can help clients by providing explanations of the impact of their proposed actions on the client’s financial plans and goals. Agents should advise clients regarding the implications of their desire to cancel or surrender a policy and also suggest alternatives that may help the client maintain the policy or maintain the same coverage with a less costly policy. Agents can help clients reposition their investments in variable products or mutual funds. They should also provide advice on the most effective way to access policy or contract values without incurring penalties or taxation. Agents should know the reason the policy was purchased and should be able to remind the client.
However, the agent must have up-to-date information upon which to base any advice. Agents should avoid giving advice unless their records include a recently updated financial and personal analysis of the client. Agents should try to meet with clients to conduct a review so that their advice is based on a sound foundation. Failure to have a recent, documented client analysis can lead to potentially improper advice.
Often after the panic caused by an economic downturn subsides, the client or his beneficiaries forget that it was the client who made the decision to initiate the surrender, withdrawal, loan, etc. This can lead to accusations that the agent provided improper advice.
To defend against potential future accusations and complaints agents should carefully document the basis for the advice they give clients. The most effective documentation is supported by a recent client review. Agents should prepare a disclosure letter that outlines the impact of the client’s decision and have the client sign the letter acknowledging their understanding of the impact of their actions.
One problem agents may face is that they may not know about actions the client takes because of the speed and ease at which the client can act directly with the company. This suggests that agents must be proactive in reaching out to clients to make themselves available for counsel and advice. Agents should be sensitive to the sense of panic some clients are feeling as they struggle to pay their mortgage and meet their other financial obligations. An agent can head off complaints, lapses and other issues by contacting clients and reassuring them of the soundness of their initial decisions.
Agents should also prepare themselves to discuss the soundness of a company’s financial condition as clients raise questions about the companies whose products they purchased. Agents should have information provided by the company that describes the financial soundness of the company and avoid developing and using their own information unless they get it approved in advance. Company information can also be useful if other agents attempt to replace policies or contracts through scare tactics related to the financial soundness of a particular insurance company.