The Referral Fee and the New Companion
Agent Diane has referred mortgage clients to her spouse's brokerage for years and receives $500 for each funded mortgage. She has mentioned the arrangement to a few clients verbally; nothing is in writing. Her client Mr. Okonkwo, 79, was widowed eight months ago and has begun a relationship with a new companion. He wants to change the beneficiary on his $400,000 universal life policy from his daughter to the companion, and to take a $150,000 policy loan to lend the companion's son for a business venture. His family doctor has noted mild cognitive impairment. His daughter holds a power of attorney for property. Mr. Okonkwo becomes agitated when Diane asks why he wants the change and says the daughter "has enough."
1. What must Diane do about the referral fee?
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The referral fee is a conflict of interest and must be disclosed in writing before or at the time of any recommendation: the existence of the arrangement, the amount or rate, and confirmation that it does not increase what the client pays. A verbal mention to a few clients is not disclosure.
She should also ask herself the harder question: is the referral itself in the client's best interest? Recommending that a 79-year-old borrow against his home to fund an insurance purchase, when the referrer is paid per funded mortgage, is exactly the kind of advice that will be examined after a complaint. The fee must never drive the recommendation, and she must not steer clients to her spouse's brokerage as a condition of her service. She should check her licensing body's and her managing general agency's rules on referral compensation and record the disclosure and the client's acknowledgement in the file.
2. Can the beneficiary change proceed? What is Diane's obligation regarding capacity?
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Not automatically. A power of attorney for property does not generally authorize changing a beneficiary designation unless the document expressly grants it, and provincial insurance legislation varies - so the first step is to read the power of attorney and confirm the local rule, not to assume the daughter can sign.
The insurer also has its own procedure: a signed change-of-beneficiary request, and, where incapacity is suspected, medical evidence or refusal. Diane's obligations are to:
- meet Mr. Okonkwo alone, without the companion present;
- establish that he understands the specific consequences - that the daughter loses $400,000, that the change is revocable, and what happens on his death;
- suggest independent legal advice;
- document the conversation in his own words.
If she is not satisfied he understands, she declines to process the change and records why. Processing it because he signed the form is not a defence.
3. How should Diane handle the $150,000 policy loan and the surrounding red flags?
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This is a cluster of red flags: recent bereavement, a new relationship, money flowing to the companion's son, diagnosed mild cognitive impairment, family conflict, and agitation when questioned.
Substance first. A $150,000 loan on a $400,000 universal life policy at 79 may be unaffordable - interest accrues at the contract rate, the death benefit shrinks, and if loan plus interest approaches the cash value the policy can lapse, leaving the daughter with nothing and a large tax bill. Ask about the loan terms: is there a promissory note, interest, security, a repayment schedule? Advise both parties to obtain legal advice.
Process. Hold the meeting privately, slow it down, test understanding by asking him to explain the outcome to his daughter, document everything, and escalate to her compliance area. She should not contact the daughter without his consent (privacy), but she may raise with him whether his attorney under the power of attorney should be involved. If the concern persists, she declines to proceed - the correct outcome is a delayed sale, not a completed one.