calculate / Olga Shumitskaya

This article appears in the March 2021 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

Part of an insurance needs assessment is making sure the client can pay premiums over the policy’s life. If a policy were to lapse in the first few years because the client can’t pay, you could be on the hook with the insurer to pay back your commission — or worse.

Problems related to funding policies are “a large percentage of the insurance work we do,” said Harold Geller, an associate at Ottawa-based MBC Law PC.

In the life insurance policies Geller’s firm has reviewed since 2006, “not one advisor” had documented a needs assessment or “reasons why” letter, he said.

There are likely fewer bad apples in recent years since the industry adopted new standards. The Approach (originally published in 2016 and based on regulatory principles established in 2006) is a seven-step process to make an effective policy sale, including needs assessment and reasons why letters. The letters, which explain the rationale for recommendations, were to be implemented into insurers’ business practices by July 2018.

Needs assessments consider various risk factors, including a customer’s ability to pay ongoing premiums. “Ensuring that a client can afford premiums now and in the future is part of the guidance provided to life agents by both insurers and regulators,” said Brent Mizzen, assistant vice-president of market conduct policy and regulation at the Canadian Life and Health Insurance Association in Toronto, in an email.

Regulators’ 2018 guidance on the fair treatment of customers is explicit that advisors must determine a client’s “ability to afford the product” before making a recommendation. The Financial Services Regulatory Authority of Ontario is currently reviewing insurers’ adoption of the overall fair treatment guidance, including how managing general agencies uphold it.

Needs assessment extends beyond gathering information such as current earnings, however, to considering risk. Even events out of the blue, like a pandemic, must be part of the analysis, Geller said.

“Whether job loss is a result of a change of ownership of an employer, a new trend, the client’s health or a pandemic is unforeseeable but equally impactful on the client’s ability to pay,” he said. “Any advisor who fails to plan for risks is negligent.”

Geller suggested advisors build “a significant negative event” into clients’ plans. The suggestion is particularly pertinent to life agents, because their sales are “based on insuring likely and remote risks,” he said.

During the pandemic, many insurers provided premium refunds or deferrals, Mizzen noted. Clients in financial straits should review their policies with their insurers to identify potential remedies for their particular situations, he said.

It’s too soon to say whether the pandemic will result in more client complaints about premiums, Geller said.

What is clear is that conducting needs assessments and writing reasons why letters help advisors justify their sales, manage client expectations and demonstrate advisors’ value and professionalism, he said.

Geller also urged advisors to document needs assessments. “Show your work,” he said. Otherwise, “it’s presumptive that you were negligent.”