The Replacement That Restarts a Ten-Year Clock

The switch is difficult to justify on these facts. The immediate costs are a 3% surrender fee of about $9,300 and a 5% front-end load of about $15,500, for roughly $24,800 before any tax. The MER rises by 0.7%, or about $2,170 per year on $310,000. She would give up a maturity guarantee that is only one year away and restart a 10-year term at age 74, pushing the new maturity date to about age 84. If the contract is non-registered, the transfer may also trigger tax on the $60,000 gain, with about $30,000 taxable.

The main possible benefit is the higher death guarantee: the new contract could lock in $310,000 rather than the old $250,000, and Eleanor's health has declined. But she is withdrawing $18,000 annually, which will reduce both guarantees proportionally, and the new fees and loads erode the estate value. A better approach is to wait until the old contract matures next year, then reassess without the 3% surrender fee. If the death guarantee is the priority, compare the cost of retaining the old contract with the cost of a new contract, and consider using new money rather than surrendering the existing contract.

This is a replacement of an existing segregated fund contract, so the advisor must complete the insurer's replacement disclosure and compare the old and new contracts. The comparison should cover the surrender fee, the new front-end load, the new surrender schedule, the MER increase, the loss of the near-term maturity guarantee, the restart of the 10-year term, the death guarantee amounts, the effect of Eleanor's withdrawals, and the tax consequences of redeeming or transferring. The client must receive the Fund Facts and Information Folder for the new contract and sign the required replacement forms.

The advisor should also assess suitability in light of Eleanor's age, health, income withdrawals, liquidity, and estate goals. The file should show why the switch is in her best interest, not merely that the new fund lineup is 'better.' The principal or compliance area should review the replacement before it is completed, and the advisor should document that Eleanor understands the costs and the loss of the old guarantee.

If Eleanor insists, the advisor should slow the process down and document informed consent. Eleanor should receive a written comparison of the old and new contracts, including all fees, the surrender and front-end loads, the lost maturity date, the new 10-year term, the death guarantee calculation, and the tax impact. She should obtain independent legal or tax advice, especially because her health has declined and the decision affects her estate. The advisor should confirm her capacity to make the decision and involve a trusted family member only with her consent.

The firm should consider whether a partial transfer or a smaller deposit into the new contract would meet her objectives without surrendering the old guarantee. If the full switch proceeds, the advisor should preserve her $18,000 income plan, confirm beneficiary designations, use the cancellation period as a final safeguard, and schedule a follow-up review. The file should record the client's stated reasons, the alternatives rejected, and the supervisor's approval so the transaction is not later characterized as churning.