Life insurance protects you and your beneficiaries financially. There are many different life insurance types – death benefit insurance, living benefit coverage such as disability and critical illness, combination products that combine living and death benefits, permanent insurance with or without a cash savings account, and health benefits.
One thing is certain – life insurance can be complicated! Due to the many different types and their long, legal fine print, this is an industry where a simple mistake, or outright fraud, can have long-ranging consequences.
And it’s not always the policyholder that makes a mistake.
The sad fact is, there are sellers that will intentionally mislead an applicant on one end of the spectrum, and sellers that overlook important information, misfile a document, or make an honest mistake on the other. If you are the policyholder caught up in fraud or are the victim of a mistake, what are your options?
Today we will look at what to do when problems arise, and when to seek legal help. To do this, we will use universal life insurance as in our case scenario, and follow the journey of an applicant call Tom.
What is universal life insurance?
Universal life insurance is a permanent policy that is among the most complicated types on the market. You are given a minimum and maximum premium allowance that you use to cover the cost of insurance and build up cash savings.
It’s an ideal tool for insurance and wealth management, but it can be difficult to understand, making it perfect for our case study. Remember, however, that any of the scenarios listed below apply to other policy types too.
Tom is a 25 year-old non-smoker male who decided to purchase universal life insurance in Canada. He is looking for universal life insurance quotes because he knows buying this policy now when he is young and healthy will provide him with a locked in premium for life and a long time horizon to invest in the cash savings account.
Tom starts off his universal life insurance quotes search by going online and looking for an agency. He comes across a pretty flashy website for an “agent” named Bill. Tom makes the call.
What are some common policy problems?
From the start, Tom was not overly comfortable with Bill. Bill talked fast, didn’t let Tom ask many questions, and really pressured him to sign the contract before he fully explained it. Intimidated, Tom signed. Next Bill said he would have one of his associates sign off on the deal and he’d send Tom copies of the contract in the mail.
First mistake – pressure. Insurance professionals are not allowed to exert undue pressure to make a sale. Since Tom signed because he felt intimated, he has 10 days to rescind the policy and receive a full refund. Any commission Bill made form the sale will be clawed back.
The second mistake – fronting. When a licensed agent talks to the applicant then has another agent, who was not involved, sign off on it, this is called fronting and it is illegal. Bill could lose his license for fronting.
Six weeks go by and Tom has not received the contract. He calls Bill who scrambles to find Tom’s file.
Third mistake – avoidable delay. Agents and brokers are legally obligated to provide the documents in a timely manner and to keep records of all transactions, conversations, and needs assessments (which Bill didn’t do) in a secure file.
What is life insurance?
Tom is frustrated but he finally has his documents and his coverage is in place. He can’t believe how fast his cash investment is growing! He starts dreaming of how he can use the money for a down payment on a home. But then tax time rolls around and he is shocked to see that he owes tax on the cash. Why? Isn’t the cash growing tax-free?
The fourth mistake – contravening the MTAR. The maximum tax accrual rule, or MTAR, is the calculation that limits how much cash a policy holder can store in a permanent life insurance policy.
The rule discourages Canadians from using their policy as a place to dump money to avoid paying taxes. Your investment grows tax free as long as you don’t cross the MTAR rule. If Bill took the time to do a full needs assessment with Tom, he would have been able to calculate and divulge Tom’s MTAR limit.
Now Tom is really mad and he is wondering what his options are, but before he can look into them he gets word form his sister that their mother had a bad fall. After a family meeting, all agree that it is time to move mom to a long-term care facility.
But how will they pay for it? Tom’s sister asks if Bill mentioned anything about long-term care insurance during their meeting. Bill did not.
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Fifth mistake – not addressing the client’s full needs. Agents and brokers have an obligation to get to know their clients and design long-ranging solutions. Had Bill taken the time to do the needs assessment, he would have learned that Tom’s parents were older and Tom himself had a risk of a chronic illness later in life due to his family health history.
Bill would have then discussed long-term care insurance with Tom’s family, along with a critical illness rider for Tom. Bill missed a potential sale but even worse, Tom and his family missed out on life-changing coverage opportunities.
Tom decides to deal with Bill later. Right now, it’s about getting mom settled in the long-term care home. He asks to remove all his cash funds to help pay for the unexpected expense. And that is when he learns Bill was using part of the premium payments to fund his own lavish lifestyle interests, and Bill’s license has also lapsed.
Sixth mistake – misappropriating funds. By using Tom’s investment for his own purposes, Bill is guilty of misappropriating, fraud, and theft.
Seventh mistake – holding out improperly. Bill misrepresented himself to Tom and other clients by operating without a license.
Tom decides to take legal action.
Let us pause here for a moment
Obviously, our case study shows a lot of points that you will likely not encounter all with the same agent or broker! The point is, there are several issues that could happen intentionally, or by mistake – missteps for which you as the policy holder have recourse. Other things to look out for include but are not limited to:
Churning/twisting – your agent asks you to cancel an in-force policy and sign onto another. This is unethical when it is for the purpose of the agent’s commission and not in your best interest
Premium rebate – you are given a “perk” of having your premium refunded or gifted by the agent. This is illegal. The only time premiums are returned are if you cancel the policy within a stated amount of time or you have a return of premium rider.
Forgery – forging documents, from licenses to applications to contracts.
Misusing illustrations – especially with permanent policies, illustrations are used to show potential investment gains or losses. Altering these in hopes of a sale is unethical.
Defamation – when an agent bad mouths their colleagues in hopes of gaining the business of that colleague’s clients, beware.
Failure to disclose – you should know who your agent or broker works for and if there are any conflicts of interest.
Unpaid claim – you meet the requirements to make a claim but are denied by the life insurance company.
Now, back to Tom. He wants to sue Bill for the shoddy way his insurance policy was handled. Does Tom have a case?
When do you need legal advice? Can you sue?
When you have issues with your insurance broker, advisor, or company (for example, the company refuses to pay a valid claim) there are several steps to take. At each step keep a record of what you said, what you were told, and whom you spoke or corresponded with.
Talk to the agent, broker, or company
Escalate to an ombudsman/regulator
Following these steps, Tom decides to give Bill a stern talking to. He tries calling but Bill doesn’t pick up. Tom notes the call in a file and then sends an email. Bill doesn’t return the email.
Tom prints a copy of the email and puts it in the file. Tom then contacts the universal life insurance company that issued his policy, but as Bill was a broker that has since become unlicensed after issuing the policy, the universal life insurance company encourages him to contact his regulator.
Most insurance companies are federally regulated. This means you can have your concerns addressed by the Financial Consumer Agency of Canada (FCAC). It may be faster and easier, however to start with your provincial or territorial regulator.
But your ombudsman or regulator are not the only solution. If you have a case, such as negligence, against your agent, broker, or universal life insurance company, or if you feel you have been denied a valid claim, you can hire a lawyer and sue.
Avoid the issues altogether
Life insurance, especially universal life insurance in Canada, requires professionals that have undergone training and continue to train each year to keep their licenses active. Before you engage with any agent, broker, or company, ask about their experience and qualifications.
Remember, if you feel pushed or intimidated in any way, you are offered incentives and premium rebates, your broker doesn’t take any time to learn about your situation and design a proper solution, or your valid claim goes unpaid, you have options.
Hopefully you’ll never be as unlucky as Tom, but if you are, help from the insurance parent company, regulator, or lawyer is available.
If Tom had started with the brokers at LSM Insurance, he would have had a much better experience! With access to more than 25 Canadian insurers and each a broker in good standing with their provincial authority, you can always count on an LMS Insurance broker to help you find the best policy for your present and future needs.