CHAPTER 4 (Part 2)

Question 1

TRUE OR FALSE?

The interests of the client cannot be placed ahead of those of the life insurance agent.

Answer 1

FALSE

The interests of the client must be placed ahead of those of the life insurance agent

[Ref. 4.2.2.1]

Question 1

What are the best practices for determining product suitability during a typical individual life insurance sales process with a client?

Answer 1

• Disclosure to client;
• Client expectations;
• Fact finding;
• Needs assessment;
• Recommendations and advice;
• Product information.

Question 2

Name six unfair or deceptive practices that agents must avoid?

Answer 2

• Tied Selling
• Churning & Twisting
• Premium Rebating
• Trafficking in insurance
• Fronting
• Unnecessary delay in delivering policies
• Misrepresentation
• Misappropriating client funds (commingling of funds)
• Making a false document (forgery)
• Holding out improperly
• Misusing company-provided illustrations
• Defamation

Question 3

Ethics Terminology

Tied Selling

Answer 3

Making a purchase of one product conditional on the purchase of another.

Example;

• Annick, a life insurance agent representing a single insurer, tells Gary, her client, that he qualifies for a registered retirement savings plan (RRSP) loan.
• However, Annick tells Gary the loan is conditional on Gary transferring his current RRSPs into products offered by the life insurance company that Annick represents.
• This is not true and therefore deceptive, but Gary trusts Annick and does as she suggests.
• Annick should never have made one transaction conditional on the purchase of another product or service.
• This is unethical behaviour as she is the only person to benefit from the transaction.

[Ref. 4.2.3.1]

Question 4

Ethics Terminology

Churning and twisting

Answer 4

Churning occurs when an agent encourages a client to give up one product for another (usually from the same insurer) in order for the agent to benefit from the commission.

Twisting is when an agent persuades a client to terminate a policy in view of replacing it with another one (generally from a different insurer).

Question 5

Ethics Terminology

Premium Rebating

Answer 5

Premium rebating involves an agent giving back or rebating a portion of the premiums.

Example;

• Irving met with his client’s son Steven, to sell him a life insurance policy.
• Since Steven was reluctant to sign, Irving offered to pay the first premium.
• In effect, Irving was offering a rebate. Irving should not offer to pay the first premium as an incentive for clients to purchase.

[Ref. 4.2.3.3]

Question 6

Ethics Terminology

Trafficking in insurance

Answer 6

Trafficking in insurance occurs when an agent acts as an intermediary between a policyholder who wishes to sell a policy (give up or absolute assignment) and a potential buyer.

Example;

• Jamie, an insurance agent who is also registered as a mutual fund salesperson, arranged the sale of viatical settlements (insurance policies assigned by terminally ill individuals to a corporation) to his clients.
• He is required to place all business through his employer, which he did not do, and made profit on the sales.
• This is an unethical and even illegal practice in some jurisdictions.

[Ref. 4.2.3.4]

Question 7

Ethics Terminology

Inducing to insure

Answer 7

An agent cannot use a gift or offer of payment to convince a client to purchase insurance.

Example;

• Nadia offers Silvano, a potential client, a discount on a policy benefit.
• She recommends adding a term rider free of charge if he buys a permanent life insurance policy.
• This is prohibited. Nadia should not try to induce a client into buying insurance by offering riders free of charge.

Question 8

Ethics Terminology

Fronting

Answer 8

Allowing another person to solicit business and submit it to an insurer under another agent’s name who has not seen or does not know the client at all.

Examples;

• Donald, the manager of the local office of an insurance company, recruits Abner to become a life insurance agent.
• Abner has not yet successfully completed the licencing examinations, so he is not licenced. However, he has
  approached a relative to buy a term policy and has brought the completed application and cheque for the first premium to Donald.
• Donald signs as agent of record and splits the commission with Abner.
• Donald should never have employed Abner without the approved licence nor signed him as agent of record, and Abner should not have approached potential clients until he had obtained his licence.
• Donald risks having his licence revoked and Abner risks never being able to obtain his.

Question 9

The Financial Services Commission of Ontario (FSCO) defines “fronting” as…

Answer 9

Situations in which an agent holds a licence but chooses to have another agent who did not actually complete the transaction sign as the agent of record, or where an unlicensed person arranges the business and has a licenced person sign on their behalf.

Question 10

TRUE OR FALSE?

The life insurance agent must not hold or retain documents intended for delivery to the client

Answer 10

TRUE

• an agent “must deliver insurance policies or evidence of insurance coverage within a reasonable time” in order to be seen to protect clients’ interests.

[Ref. 4.2.3.7]

Question 11

TRUE OR FALSE?

It is a violation for any life insurance agent to
make, issue, or circulate any illustration or sales material, or to make any statement that is false, misleading or deceptive.

Answer 11

TRUE

• This is described as an “unfair or deceptive act or practice” in the Insurance Act of Ontario

Question 12

TRUE OR FALSE?

Taking money or other property received from the client for a specific purpose and fraudulently misapplying it to another purpose is considered a deceptive practice and is illegal.

Answer 12

TRUE

Question 13

FILL IN THE BLANK!

________ is a criminal offence and involves the agent making a false document and knowingly doing so.

Answer 13

Forgery

Question 14

According to The Canadian Association of Independent Life Brokerage Agencies (CAILBA), a life insurance agent who holds out properly must (name at least two)…

Answer 14

• Ensure his licence is posted in a publicly visible place;
• Hold out under the name on the licence unless provincial regulation allows otherwise;
• Not mislead as to qualifications or the nature of business being conducted;
• Avoid terms that indicate meaningful specialized training and competency unless the agent has
  actually achieved the claimed level of training and/or competency;
• Not claim to have “associates” unless there is at least one licenced individual with equal or better
  qualifications;
• Not hold out as a financial planner unless holding a planning designation recognized by the
  Financial Planning Standards Council.

Question 15

Ethics Terminology

Defamation

Answer 15

It is unethical for a life insurance agent to be maliciously critical or derogatory about any colleague, agency or insurer.

Question 16

To fully understand policy replacement disclosure, a life insurance agent should have a basic understanding of…
(name three)

Answer 16

• How policies differ;
• Why it might be appropriate to recommend replacement;
• The risks inherent in replacement even where it may be appropriate;
• Existing insurance that may have cash values;
• Negative tax consequences.

Question 17

Ethics Terminology

Life Insurance Replacement Declaration (LIRD)

Answer 17

This document outlines a number of essential elements that the client must be aware of prior to the replacement of a life insurance policy or rider.

It helps ensure that the client receives full disclosure of all relevant details required to make an informed decision.

[Ref. 4.2.4.2]

Question 18

Ethics Terminology

Errors and omissions (E&O)

Answer 18

Agents are required to have errors and omissions (E&O) coverage which provides indemnity for negligence, error, or omission (professional liability insurance) and protects life insurance agents from financial losses they may suffer.

Question 19

TRUE OR FALSE?

Errors and omissions (E&O) coverage doesn’t apply to negligence, errors and omissions, however, it will cover intentional acts, and misappropriations.

Answer 19

FALSE

Errors and omissions (E&O) coverage applies to negligence, errors and omissions, but not to intentional acts, misappropriations, fraud or criminal activities such as forgery

[Ref. 4.2.5.1]

Question 20

How does an agent mitigate any potential complaints or even lawsuits against them?

Answer 20

• He must keep detailed notes and correspondence of the original transactions, the recommendations made and the client’s acceptance/non-acceptance of those recommendations.
• By doing so, the agent will have the necessary proof readily available to prove he carried out his business correctly.

Question 21

TRUE OR FALSE?

An agent should not deliver the policy to the client without verifying and ascertaining any potential change in his health status.

Answer 21

TRUE

Question 22

TRUE OR FALSE?

In regards to contract delivery, an agent must be certain that between the time of signing the contract and delivering it, no change in the health status of the client has occurred.

Answer 22

TRUE

Question 23

TRUE OR FALSE?

In regards to contract delivery, if the agent notices that there have been significant changes in the client’s insurability since the application was signed, he should deliver the policy and update the application.

Answer 23

FALSE

In regards to contract delivery, if the agent notices that there have been significant changes in the client’s insurability since the application was signed, he must not give him the policy and he must have the application updated.

[Ref. 4.2.5.3]

Question 24

What are the core ethical values? *(name at least three)*

Answer 24

- Acting in good faith (care, competence and integrity); - Managing conflicts of interest properly; - Refraining from unfair or deceptive acts or practices; - Making proper disclosure; - Acting in compliance of regulation and codes of conducts; - Handling complaints in a timely and fair manner.

Question 25

What is the purpose of licencing life insurance agents and agencies ?

Answer 25

The notion of public order in licencing aims to protect the public against incompetent agents, unfair or deceptive practices and unethical activities

Question 26

What are the two types of Life Licence Qualification Program (LLQP)?

Answer 26

- Full LLQP - LLQP Accident & Sickness (A&S).

Question 27

Under what grounds appearing to the licencee that the Superintendent may suspend or revoke a licence on which an application for a licence may be refused or if, after due investigation and hearing?

Answer 27

*If the licencee;* - Has violated any provision of the licence in the licencee’s operations as an agent; - Has made a material misstatement or omission in the application for the licence; - Has been guilty of a fraudulent act or practice; or - Has demonstrated incompetence or untrustworthiness to transact the insurance agency business for which the licence has been granted. | [Ref. 4.2.5.3]

Question 28

What are other products and services for which a licence or registration is required?

Answer 28

- Property and casualty insurance; - Securities, including exchange-traded funds (ETF) or mutual funds; - Mortgage brokering.