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8 ways to avoid E&O claims

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Assisting your clients (and their advisors) monitor their life insurance portfolios will reinforce your position as a trusted advisor, increase your professionalism, reduce your exposure to errors and omissions (E&O) claims and is the way to provide the most benefit to your client.  Helping your clients is the best way to help yourself.  Advisors who strive to help are those who will enjoy the most success and will be able to sleep at night. 

Insurance companies require life insurance agents and annuity agents to carry profession liability errors & omissions insurance (E&O) for the simple reason that there is a likelihood that you will need it.  Facing an E&O claim is akin to an IRS in-depth audit and can be substantially worse, so avoiding an E&O claim is well advised. 

Here’s what you as a life insurance advisor can do to lower your E&O risk and best serve your client. Note that these tips are not guaranteed to keep you from facing an E&O claim; they can only reduce your risk.

(1) Is the amount of life insurance coverage the right amount? 

If you have not been keeping up and reviewing your clients needs and your client is dramatically under-insured or over-insured, you could find yourself dealing with some very angry heirs. 

What could make this situation worse: selling the wrong type of life insurance, causing a trade-off of less coverage for higher premiums.  Are you making sure your clients have enough coverage first or are you thinking of cash accumulation first?  Remember, life insurance is insurance first. If you’re not making sure that a risk is fully covered, you are putting yourself at risk.

(2) Can your client find a better rate for term insurance? 

Premiums, policies and underwriting standards are consistently shifting.  With term insurance this can be especially true and relatively easy to determine, you can easily survey the market by having your client complete a simplified health questionnaire using the most common underwriting issues:

  • height

  • weight

  • c. blood pressure

  • cholesterol

  • family history

  • smoking

  • travel plans

  • past diagnosis of medical condition or disease

  • whether any procedures are schedules or have been completed

  • list of all medications (with reason taken)

  • driving records

  • potentially hazardous avocations such as scuba diving, being a private pilot, sky diving, etc.)

3. Are beneficiary designations up-to-date? Is the correct beneficiary named?

Common issues are ex-spouses/life partners, ex-business partners, a deceased beneficiary, etc.; or not having beneficiaries updated to reflect a new spouse/life partner, new child, etc. 

Also to consider is whether the policy owner named a contingent beneficiary: a secondary beneficiary who receives policy proceeds in the event the primary beneficiary predeceases the insured.  If there is no contingent beneficiary and the primary beneficiary is deceased, the proceeds will be payable to the estate of the insured.

The proceeds will also be distributed according to whatever mechanism the owner has put into place for their estate by will, trust or state probate rules. Upshot: The proceeds may go to someone other than the intended beneficiary.

4. Does the insurance company have any financial issues?

Make sure that the company’s current financial strength ratings are acceptable.  If the financial strength ratings are declining, try to find out the reason. It can be minor or a clear warning of potential issues with the insurance company. Financial Strength Ratings are available at no cost from A.M. Best, Fitch, Moody’s and Standard & Poor’s.

5. On permanent, cash value policies, does the policy provide the best value?

This becomes more complex and has to take into account a thorough understanding of the client’s needs, goals and knowledge of all the product components for both the existing policy and a proposed replacement policy. 

For example, a guaranteed universal life policy may have the guarantee on the death benefit; however this will come at the expense of the cash value and the guarantee may be subject to certain conditions.

Underwriting classification may also make a difference. Guaranteed interest rates on older policies are usually higher than those on new policies. Always draw up a list of pros and cons for yourself and for the policy owner (and third party advisor, if applicable). 

6. Will the life insurance policy terminate prior to the date expected? 

This can happen with: (a) interest-sensitive policies sold in the 1980’s and 1990’s that were based on projections of interest rates significantly higher than current interest rates; and (b) policies wherein premiums were projected to be paid for a limited period.

Most insurers do not inform policy owners of the earlier-than-expected lapse timing (either maturity or life expectancy) nor of the need to increase the premium (and what that premium would be or how much longer it would need to be paid for).

The solution is to request in-force illustrations from the insurance companies, usually at least two: an (1) in-force illustration based on current premiums and interest rates/dividend scale, cost of insurance (mortality costs) and expense charges; and (2) an in-force illustration solving for the premium required to endow the policy at maturity based on current premiums, plus interest rates/dividend scale, cost of insurance (mortality costs) and expense charges.

While the new premium may be quite higher than the originally planned premium, the sooner it’s caught, the better as this issue will compound.  Additional in-forces can be ordered based on the specific policy such as number of years required to pay premium, loan pay-off scenarios, etc. 

Whole Life policies may allow for dividends to reduce and/or pay premium (lowering your clients out pocket costs). Instead, consider directing that money to a long term care insurance policy.  For variable policies instead of an interest rate, consider using a conservative rate of return. 

7. Do riders still make sense? 

Riders add to the premiums that your clients pay; however, they oftentimes don’t provide significant value. 

Do your clients need accidental death and dismemberment coverage when they have sufficient life and disability insurance coverage?  Going through all policy riders will help your client’s cash flow and make sure they have just the insurance they need, no more and no less.

8. Is there a policy loan? 

This is a special issue and needs to be reviewed in-depth.  Policy loans can erode the value of the policy, causing is to collapse — especially when policy owners continue to borrow the loan interest. 

This issue is compounded by the fact mentioned above: that interest rates and divided scales are lower than originally projected on older policies.  Be sure to run the in-force illustrations mentioned in #6 and address this before it becomes too late.

If you are pro-active in ensuring that your clients properly and thoroughly review their life insurance coverage (and all of their insurance coverage), you will be providing the highest level of service and acting with the utmost professionalism.  You will help your clients (and yourself) avoid unpleasant surprises in the future when things can’t be changed.  The Golden Rule applies: Do unto others as you would have others do unto you.