Replacing a Whole Life Policy to Fund University Fees

Protection need first. With two young children and a $220,000 mortgage, the family's priority is death and disability cover, not investment returns. A rough income-replacement approach of ten times income gives about $960,000; deduct the $100,000 whole life sum assured and $15,000 of savings, and the gap is well over $800,000 before mortgage and education needs are added. Lisa never quantified this.

Affordability and total commitment. $500 a month is $6,000 a year, about 6.25% of gross income, on top of the existing whole life premium. Lisa did not check total commitments against disposable income, the mortgage, or an emergency fund. Six months of expenses is a more urgent need than a 10-year investment.

Objective, horizon and risk. The target is $120,000 in 10 to 12 years. At an 8% illustration, $22,000 plus $500 a month for 10 years projects to roughly $137,000, so the target is plausible on paper. At a 4% illustration it projects to about $106,000 - short. Lisa presented one rate as if it were an expectation. She recorded no risk profile, no capacity for loss, and no discussion of what happens if the fund falls 20% in year nine.

Product comparison. No comparison was made between keeping the whole life policy and saving separately, between an investment-linked plan and a lower-risk endowment or a term-plus-investment split, or between the new plan's charges and the alternatives.

The gaps. No fact-find, no documented rationale, no suitability assessment, no replacement analysis, no risk disclosure, and an oral statement about the 8% return that the client could reasonably have heard as a promise. The recommendation was product-led, not needs-led, and the file would not survive a review.

What is lost. Surrendering ends $100,000 of guaranteed death cover. The new plan's death benefit is likely to be the fund value, not a guaranteed sum assured, so in the early years the family could be less protected than before - while the mortgage is still $220,000. Surrender also crystallises a loss against premiums paid and gives up any valuable guarantees or options in the 2013 policy.

What is gained and what it costs. The 5% bid-offer spread takes about $1,100 off the $22,000 on day one, and surrender charges apply for three years, so the client is locked in precisely when the money should be compounding. The 8% figure is an illustration, not a promise; a fund's past average says nothing about the next ten years. Telling the clients they will "be insured anyway" is misleading if the death benefit equals the fund value.

Disclosure obligations. A replacement disclosure or comparison form must be completed, signed by the clients and submitted to the insurer (and in some markets to the appointed actuary). Lisa must disclose commission and charges in dollar terms, explain the surrender penalty and the loss of existing cover in writing, and give the product summary and the risk warnings before signature. The clients should have been given time to consider and the chance to take advice.

Better alternatives. (1) Keep the whole life policy and start a separate monthly savings or investment plan at an affordable amount - this preserves $100,000 of cover and avoids the surrender loss. (2) Keep the policy and add cheap term cover to close the protection gap, then invest the balance. (3) If the whole life policy is expensive for its cover, compare a term-plus-investment structure properly, including charges over 10 years. (4) For a 10-year education goal, consider a lower-volatility vehicle with a known maturity value rather than a market-linked plan.

Conclusion. The replacement may be defensible in some form, but not on this file: it was sold on an overstated return, with the loss of cover never quantified, and without the required disclosure. Lisa should be able to show why each alternative was rejected.

Support the right, do not resist it. A free-look or cooling-off right lets the client cancel within the stated period after receiving the policy - commonly around 14 days - and receive the premium back, less any medical or expenses incurred and, for investment products, any fall in the value of the units. Lisa's duty is to explain the right accurately, provide the form, and process the request promptly. Any attempt to talk her out of it, delay the paperwork, or imply that she cannot cancel would be a conduct breach and would make a complaint much worse.

Protect the client's position. First establish whether the whole life policy has actually been surrendered. If it has not, stop the surrender immediately and confirm with the insurer that the old policy remains in force. If it has, ask whether reinstatement is possible, on what terms, and whether fresh medical evidence is required - the family's health may have changed since 2013, which is exactly the risk of replacing cover.

Document everything. Record the call, what she was told, the date of the request and the date it was submitted. Send a written confirmation with the expected refund and timeline. Log it as a complaint under the firm's complaints process, with a written response and escalation route, because the brother's concern about charges suggests a wider mis-selling allegation.

Make the follow-up useful, not salesy. Offer a proper needs analysis at a later date, with the protection gap quantified and the charges shown in dollars, and no pressure to sign on the day. Rebuilding trust after a cooling-off cancellation depends on being seen to put the client's interest ahead of the sale.

Internal consequences. Expect a review of the file: no needs analysis and no replacement form are likely breaches. Cooperate fully, correct any similar files, and treat this as a process failure to be fixed, not a one-off.