LIFE INSURANCE SUITABILITY REVIEW
Whose Job Is It?
Metropolitan Underwriters Discussion Group
January 30, 2012
Gary Frank J.D., CLU, ChFC
Vice President, Compliance
Aviva USA
Introduction
The purpose of this presentation is really twofold – (1) to provide the audience with an
overview and discussion points on the subject of suitability review of life insurance
applications, and (2) to provide an example of a process to perform suitability review for
replacement cases.
There has been recent regulatory and legislative activity around the issue of insurable
interest in the context of Stranger-owned/Investor-owned life insurance. Premium
financing techniques, mortgage-related financing of life insurance and their associated
representations are also under the microscope. In addition, there is renewed regulatory
concern over portrayal of life insurance as a retirement plan.
Unlike the rules/requirements surrounding annuity applications, most of which are
encompassed in the NAIC Suitability of Annuity Transactions Model Regulation, there is
no comparable regulation that has been enacted by the states for life insurance
purchases. Additionally, only a handful of states have specific regulations that are
categorized as “life insurance suitability.” However, most if not all states believe that
companies have an obligation to perform basic financial underwriting and many states
are increasingly concerned with replacement activity, the suitability of agent replacement
recommendations, and the insurance company’s ability to evaluate/monitor such activity.
For Internal Use Only
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Some Preliminary Perspectives
Notable Quotes:
• Agent to underwriter – “Field Underwriting? What do you
mean? I thought underwriting was the home office’s
job.”
• Client to agent – “Why do they need all this financial
information? Your company should be happy I’m buying
insurance from them.”
• Sales VP to Advanced Markets Director – “It’s a great
concept. The agent believes in it. The client wants it.
Why are you challenging it?”
• Chief Underwriter to staff – “Don’t let the perfume of the
premium overpower the smell of the risk.”
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Regulatory View – Life Suitability
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Reasonable recommendation standard
Identification of needs/objective
Appropriate amount of coverage
Appropriate premium
Appropriate product
Insurable Interest statutes
Anti-STOLI/IOLI regulations
Replacement regulations
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Life Suitability Basic Considerations
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What needs/objectives were identified by agent?
What is the purpose for the insurance?
Is Insurable Interest demonstrated?
Does the ownership & beneficiary arrangement align
with the indicated purpose?
• Is the amount of proposed insurance justified?
• Was an acceptable sales/marketing concept used?
• If a replacement, is it in the best interests of the
applicant?
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Life Suitability - Other Considerations
• Does the illustration match the stated purpose/objective?
• Is the illustration overly aggressive? (Sensitivity testing)
• Does the proposed owner/insured/beneficiary
arrangement pose adverse tax consequences?
• Does the arrangement pose an unacceptable conflict of
interest for the agent?
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Agent as proposed owner or with POA
Agent as trustee
Agent as beneficiary
Agent as collateral assignee
• Are there indications in the file that the applicant may not
understand the transaction?
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Life Suitability Review
Traditionally, New Business has evaluated…
• Proper completion of application and other forms
• Management of workflows around issue and delivery
process/requirements
• Issues involving third party ownership (trusts, business
entities, etc)
• Proper completion of 1035 exchange process
• Proper completion of replacement paperwork and related
requirements
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Life Suitability Review
Traditionally, Underwriting has evaluated….
• Appropriateness of proposed face amount
• Insurable interest
• Ownership & beneficiary arrangements
• General financial underwriting factors
• Targeted financial underwriting issues (within prescribed
parameters)
• Purpose of the insurance
• Whether case represents unacceptable or problematic
marketing concept identified by Legal/Advanced Markets
• To some extent, the reasonableness of replacements
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Financial Underwriting
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Analysis of basic financial profile of applicant
Use of financial supplements/questionnaires
Evaluation of economic loss/insurable interest
Too much or too little?
Total in force with all companies
Ability to pay ongoing premiums/source of funds
Does the proposed coverage (type, amount, planned
premium, selected riders, etc.) make economic sense?
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Financial Underwriting (cont.)
How does the analysis differ among:
• Personal income replacement cases
• Personal specified needs case
• Estate conservation
• Charitable Giving
• Juvenile insurance
• Debt repayment
• Business continuation
• Executive benefits
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Financial Underwriting (cont.)
Home Office relationships/dependencies:
• Legal
• Compliance
• Advanced Markets
• Marketing/Illustration Support
• Product management
• Sales & Distribution
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LIFE SUITABILITY REVIEW
PROCESS
A Focus on Replacement Cases
Life to Life Replacements
Key Considerations:
• Disclosure of surrender charges on replaced product
• Disclosure of new surrender charge period
• Discussion of guaranteed/non-guaranteed elements
• Existing/proposed face amount of coverage
• Existing/proposed annual premiums
• Comparison of features/benefits/riders
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Life to Life Replacements
Key Considerations (cont.):
• New suicide exclusion, contestable period
• Original issue age vs. attained age
• Underwriting classification (current vs. proposed)
• Matching owner/insured/beneficiary arrangement
• Use 1035 exchange process to avoid taxable gain and
carry over cost basis
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Annuity to Life Replacements
Key considerations:
• Income tax impact on surrender of annuity contract (No
1035 tax-free exchange)
• Identified need for life insurance / objective to be
accomplished
• Age of applicant at time of purchase
• Can life insurance be issued on standard basis?
• Can customer meet obligation of ongoing premium
payments?
• Has original need/objective for annuity disappeared?
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Life Suitability Review Project
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Emphasis on replacements
Primary focus on documentation
Secondary focus on evaluation/monitoring
A more targeted, simplified process, compared to annuity
suitability review
• Revised Agent’s Report
– Completion in good order
– Replacements Review Team
– Escalation triggers
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Revised Agent’s Report
1. a. Does the proposed insured have any life insurance or annuity contract(s)
currently active with our company or any other company?
Yes No
(If Yes, and if required by state regulation, any Replacement Comparison, Notice or
Statement must accompany this application.)
b. Will any annuity or life insurance presently or recently in force be replaced or
changed by this policy applied for?. . . . . . . . . . . . . .
Yes No
if 1b is answered “yes”, please complete the following questions:
i. What is the primary reason for the replacement?
__________________________________________________________
ii. Are you the writing agent on the current policy? . . . . . . . . . . . . . . . . . . Yes No
iii. When was the current policy issued?
_____________________________________________________________________
iv. With what underwriting classification was the current policy
issued?__________________________________________________________
v. What are the current/proposed annualized premiums?
____________________________________________________________________
vi. What are the current/proposed death benefit amounts?
___________________________________________________________________
vii. What are the remaining surrender charges on the current policy?
___________________________________________________________
viii. Have you discussed/described the surrender charges and surrender charge period
regarding the proposed policy? . . . . . . . .
Yes No
ix. If values from an existing annuity contract are being used to pay premiums on the
proposed policy, how has the original objective of the annuity contract
changed?_____________________________________________________________
x. If values from an existing annuity contract are being used to pay premiums on the
proposed policy, have any tax implications been explained to the customer? . Yes No
xi. 1035 Exchange (attach required forms) External Internal
__________________________________________________________
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Revised Agent’s Report
Confirmation of completion in good order:
• Data Entry staff’s responsibility
• Obtain missing information through appropriate contact
• Resolve conflicting information through appropriate
contact
– Application and agent’s report conflict
– Q 1.b answered “no” but replacement form or 1035
exchange transmittal submitted w/app
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Revised Agent’s Report
Question 1.b.i (primary reason):
• Looking for substantive reason(s)
• “Better product” or “Upgrade” insufficient
• Generally handled w/request for additional
information/description
• No escalation required if reason is plausible, does not
conflict w/replacement form, and recommendation
appears reasonable
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Revised Agent’s Report
Question 1.b.ii (writing agent on current policy):
• This question’s primary purpose is to identify a trend
(significant replacement activity w/question answered
“yes”)
• Important related questions are 1.b.i, 1.b.iii and 1.b.vii.
• If a trend is discovered (e.g. 5 or more similar
transactions within 12 months) referral to Escalation
Team is appropriate
• Possible referral to Agent Monitoring
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Revised Agent’s Report
Question 1.b.iii (current policy issue date):
• Relevant in relation to other responses
• Recent issue date could mean substantial surrender
charges
• Possible relevance to churning/twisting (i.e. multiple
replacements with recent issue dates)
• Remote issue date could indicate existing policy is quite
healthy or even in “paid-up” status
• Remote issue date (on other hand) could bolster reason
for replacement
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Revised Agent’s Report
Question 1.b.iv (current policy underwriting class):
• A key inquiry
• Particularly relevant if Underwriting considering “adverse
action” on proposed coverage
• Not necessarily concerned with preferred (current policy)
and standard issue (proposed policy)
• Table ratings require additional inquiry if current policy
standard
• Substantial rating (Table C or >) requires Life Policy
Review
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Revised Agent’s Report
Question 1.b.v (premium comparison):
• Comparable face amounts but significantly higher
premiums on proposed coverage
• Request explanation – could be that client objectives
justify higher premiums
• If explanation insufficient, request in force ledger
• If in force ledger indicates no benefit (or, in fact, the
opposite), refer to Escalation Team)
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Revised Agent’s Report
Question 1.b.vi (face amount comparison):
• Proposed face amount substantially lower
– Request explanation – could be plausible change in
needs/objectives
– If no/insufficient explanation provided, refer to
Escalation Team
• Proposed face amount substantially higher
– Request explanation - could be plausible change in
needs/financial condition
– Could be effort to consolidate smaller policies
– Look at sufficiency of planned premiums
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Revised Agent’s Report
Question 1.b.vii (current policy surrender charges):
• Anticipate no answer or “unknown” response
• If current policy issued with last five years, notify contact
that information is required (if U.L. chassis product)
Question 1.b.viii (discussion of proposed policy surrender
charges):
• If answered “no,” request explanation why surrender
charges (amount/duration) on proposed policy not
discussed
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Revised Agent’s Report
Questions 1.b.ix and 1.b.x (annuity values):
• Looking for brief substantive explanation (e.g.):
– Customer has concluded they do not need the
annuity for income
– Customer withdrawing small percentage of annuity
accumulation to maximize overall value to heirs
• “Wealth transfer” is insufficient response to 1.b.ix (but
may be sufficient response to 1.b.i)
• If answer to 1.b.x is “no,” request explanation from
agent/contact
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Revised Agent’s Report
Questions 1.b.xi (1035 exchange):
• Could be plausible explanation if left blank or answered
“N/A” – typically if no taxable gain upon surrender of
current policy
• Request explanation
• If lump sum proceeds from surrendered policy creates a
MEC, request justification from agent/contact
• If justification does not make sense, refer to Escalation
Team
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Revised Agent’s Report
Review of Agent’s Report:
• Replacement Review Team’s responsibility
• Evaluate reasonableness of recommendation
• Consider additional information – in application,
replacement form, cover letter, etc.
• Examine sufficiency of responses
• Identify any red flags
• Resolution via clarification from agent/contact
• Resolution via escalation team
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Revised Agent’s Report – Red Flags
Key “Red Flags” include:
• Proposed face amount substantially lower
• Proposed premium substantially higher
• Ambiguity as to primary reason for replacement
• Substantial surrender charges on current policy
• Information provided indicates no demonstrable benefit
(or, in fact, indicates the opposite)
• Proposed policy will be issued with table rating or
exclusion rider
• 1035 process not used
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Escalation Triggers
• Information in file indicates replacement would likely be
detrimental to customer
• Current coverage issued standard or better, proposed
coverage issued w/Table rating
• Substantially lower coverage w/o adequate explanation
• Substantial conflicting information in file not resolved
through explanation from agent/contact
• Significant replacement activity identified
• Agent/contact generally uncooperative
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General Reminders/Pointers
• Primary goal is to conduct inquiry into replacement
transactions and document responses
• Majority of agents exercise care when making
replacement recommendations
• Red flags do not = decline or even escalation
• Red flags do = request for additional information
• Looking for coherent, plausible explanations when
further information requested
• Referral to Escalation Team relatively infrequent
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Life Suitability Review - Concluding
Remarks
• Clear communication and cooperation among Home
Office Departments is critical
• Include the topic of life insurance suitability in agent
training venues and field communications
• Encourage agents to “tell the story” (the lost art of the
cover letter)
• Make internal sales staff and field aware of heightened
regulatory scrutiny of replacements in market conduct
examinations and agent investigations
• Anticipate new regulation in this area
• Suitability review is a key component for persistent &
profitable business.
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QUESTIONS & COMMENTS?
Thank You!