Replacement of a Whole Life Policy Near Surrender-Charge Expiry
A 58-year-old client holds a participating whole life policy with a death benefit of USD 200,000 and a cash value of USD 80,000. The policy has a surrender charge that falls to zero in eight months. The client has type 2 diabetes and hypertension, controlled with medication, and a family history of stroke. An agent proposes replacing it with a universal life policy with a USD 300,000 death benefit and an initial annual premium of USD 9,000, funded partly by surrendering the old policy. The illustration shows non-guaranteed cash values at 6% and 4% crediting rates and guaranteed values well below the old policy. The agent's commission on the new policy is 55% of first-year premium, compared with 3% renewal on the old policy. The agent gives the client a replacement notice but does not obtain a signed comparison of guaranteed values, and does not mention that the new policy's cost of insurance increases with age.
1. Evaluate whether the replacement is suitable for this client.
Read the worked answer
The replacement is difficult to justify on these facts. The client is 58, has diabetes and hypertension, and has a family history of stroke. A new policy will be subject to fresh underwriting, and the client may be rated, excluded, or declined. The existing policy already has USD 80,000 of cash value and a USD 200,000 death benefit, and the surrender charge disappears in eight months. Surrendering now crystallises a cost that could be avoided.
The new policy's guaranteed values are well below the old policy's values, and the illustrated 6% and 4% crediting rates are not guaranteed. The cost of insurance increases with age, so the USD 9,000 premium may not be sufficient to keep the policy in force to an advanced age. Funding the premium partly from the old policy's cash value reduces the client's reserve and increases the risk of lapse. The higher death benefit of USD 300,000 may be a legitimate need, but the agent has not established that need or compared the cost of obtaining additional cover through a rider or a separate term policy.
The 55% first-year commission creates a clear conflict of interest. A suitable recommendation would normally be to keep the existing policy, consider a small additional term or rider if more cover is needed, and revisit the position after the surrender charge expires.
2. What disclosure and documentation obligations apply to this replacement?
Read the worked answer
The agent must follow the replacement rules in force: provide the replacement notice, obtain the client's signed acknowledgement, and give a fair and balanced comparison of the old and new policies. The comparison should show guaranteed and non-guaranteed values, surrender charges and their expiry, death benefits, premium requirements, cost-of-insurance structure, policy fees, and the effect of a new contestability or suicide clause.
The agent must disclose the commission conflict in plain terms: 55% of the first-year premium compared with 3% renewal on the existing policy. The client should understand that the agent has a financial incentive to recommend replacement. The agent must also explain that the new policy's cost of insurance increases with age and that the illustrated values are not guaranteed.
The file should contain a documented needs analysis, the client's stated objectives and financial position, the replacement comparison, the signed replacement notice, the illustration, and a note of the advice given. The agent should not rely on a generic form; the comparison must be specific to these policies and these numbers.
3. If the client later complains of mis-selling, what evidence will determine the outcome and what remedies may follow?
Read the worked answer
The outcome will turn on the contemporaneous file. The insurer and regulator will ask whether there was a documented needs analysis, whether the client received and signed the replacement notice, whether a guaranteed-value comparison was provided, whether the commission was disclosed, and whether the agent explained the increasing cost of insurance and the risk of lapse. If those records are missing, the agent will struggle to prove that the advice was suitable, and the burden will shift against him.
Remedies may include restoring the old policy if it is still within the reinstatement period, paying the difference between the actual position and the position the client would have been in had the old policy been retained, refunding the commission, and compensating for surrender charges and lost cash value. The insurer may also face a regulatory fine and have to review all similar replacements by the same agent.
The agent may face disciplinary action for breach of conduct, failure to disclose conflicts, and unsuitable advice. If the client was declined or rated for the new policy, the replacement may have left him worse off with no cover; that would strengthen the complaint and could lead to a negligence claim. The key lesson is that replacement advice must be client-focused, documented, and tested against the guaranteed values, not against a favourable illustration.