Can you prove insurance suitability?
By Ken Godfrey
Life Insurance Financial Evaluations, LLC
It is a commonly held belief that product suitability is only required at the time of sale. However, the suitability of a life insurance product sale may be scrutinized by others long after a policy was issued. For instance, the suitability of the policy may be analyzed by the state insurance commissioner, FINRA, CFP Board or other regulatory or agent oversight authority, particularly in cases when a policy underperforms or lapses and the consumer subsequently files a complaint.
When making suitability determinations years after policy inception, it is important that the selling agent be able to justify why the policy was suitable when sold. Otherwise, an oversight authority may determine that the policy was unsuitable and subject the agent to discipline such as fines, suspensions or revocations. This can create a significant negative reputation and make a financial impact on the agent, especially if notification requirements of disciplinary sanctions are required to be made to all current and prospective clients.
Therefore, it is prudent for the agent to fully document the client files when selling life insurance and other products. Information should include items such as:
- Whether or not the agent was subject to fiduciary or suitability standards, and why
- Any sales materials or correspondence used in the sales process
- What alternatives were considered
- The reasons for the policy recommendation
- The reasons for the policy replacement or section 1035 exchange (if applicable)
- Why the carrier and product were chosen
- Why assumptions such as interest crediting rates were chosen
- What disclosures were made to the client
- The compensation received, and if and how it was communicated to the customer*
However, if the insurance agent is also considered a fiduciary in any activities associated with the client, commission disclosures may be required under fiduciary rules. The rules regarding compensation disclosure continue to be evaluated, and it will be interesting to see if full commission disclosure is required on insurance products in the near future.
See also: Suitability isn't a four-letter word
Consumer protection and disclosures are hot topics in the financial services industry. Agents need to stay abreast of suitability and fiduciary rules, and find ways to protect themselves when outcomes may not go as planned. Having proper documentation readily available should go a long way to protect the livelihood of the agent if necessary at any point in the future.