DO's and DONT'S of POLICY REPLACEMENTS

11/10/2009 1:41:45 PM

Policy replacement is usually considered when someone has an existing policy that either cannot be amended or has benefits that can be improved at a lower cost. It is however, essential that the replacement policy is beneficial to the client. All the advantages and disadvantages must be clearly stated so that the client will be able to make an informed and calculated decision.

Example: a client requires additional Life Cover urgently to provide surety for a home loan. He already has a policy with 7.5 times the required amount available but this is to provide for his wife and family in the event of his death. The monthly premium is fixed and guaranteed for the next 13 years, taking him past the normal retirement age of 65. You are asked to prepare quotations for a new policy with the lowest rates as a priority as the cover would only be required for 5 years. The client informs you that he would be cancelling his existing policy on acceptance of the new one.

The situation creates the following problems: not only does the replacement contradict every bit of compliancy that you have to adhere to but documentation will have to be drafted with statements for the client to sign to attest to the fact that his decision was made against advice and that the client accepts sole responsibility for any and all potential future problems that might occur as a result thereof. To cover all angles, it is advised that the client’s spouse also signs these documents.

The FAIS Act requires the intermediary to provide clients with good, impartial financial advice. Should the intermediary actually advice his client to do what was explained earlier, the broker could run the risk of having his licence revoked.

This is a perfect example of the client NOT always being right. Even though this might have been a client for 20 years, it is of the utmost importance to give serious consideration to the impact of the substitution on the future financial security of the client’s dependants.