Replacing a Nine-Year Endowment Policy at Surrender
Mr. Kamran, aged 47, is married with two school-going children and earns Rs 250,000 a month. Nine years ago he bought a 12-year participating endowment policy with a sum assured of Rs 1.5 million and an annual premium of Rs 95,000. He has paid Rs 855,000 in premiums. The insurer's current surrender value quotation is Rs 610,000, and the policy matures in three years with accrued bonuses. Agent Ayesha proposes that he surrender it and buy a new unit-linked policy with a Rs 2 million sum assured and an annual premium of Rs 180,000. She says the new plan offers a higher sum assured and investment upside, and earns her 35% first-year commission. She does not mention the surrender loss, new underwriting, contestability, charges, or the commission conflict. Mr. Kamran says he trusts her and asks her to do whatever is best.
1. Evaluate Ayesha's recommendation against life insurance agency professional standards. Identify at least four disclosures she must make before any replacement and explain why each matters to Mr. Kamran.
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A replacement can be suitable, but the recommendation as described is not defensible because it compares only sum assured and upside while ignoring the client's existing position. Ayesha must first establish need and affordability: the new annual premium is nearly double, and the new policy may run past his planned retirement. She must disclose:
- The surrender value of Rs 610,000 against Rs 855,000 paid, and the bonuses forfeited by surrendering three years before maturity. This is the client's immediate, certain loss.
- All charges in the new unit-linked policy, including allocation, fund management, mortality and surrender charges, and the fact that early surrender may return less than premiums paid.
- New underwriting and contestability, including that a death claim may be investigated and the policy may be avoided for non-disclosure in the early years.
- Her 35% first-year commission and any replacement or trail commission, because it creates a conflict of interest that the client is entitled to weigh.
- The loss of the old policy's contractual features, such as maturity date, bonuses, and any loan or assignment rights.
She should compare old and new policies on a like-for-like basis, document the client's reasons, and give him time to decide. If the replacement is not clearly better, she should recommend retaining the old policy.
2. Mr. Kamran says he trusts Ayesha and asks her to proceed without further discussion. What should Ayesha do to document suitability and protect both the client and herself? Explain the limits of a verbal instruction.
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Trust is not a substitute for a documented needs analysis. Ayesha should complete a written fact-find covering income, dependants, existing cover, savings, liabilities, retirement age and risk tolerance. She should record that the new premium is 72% of his current annual premium and test whether it is sustainable. She should prepare a replacement comparison showing surrender value, lost bonuses, old and new charges, surrender penalties, and projected values under reasonable assumptions. Mr. Kamran should sign the replacement disclosure and the illustration, and should receive the free-look notice. If he still insists after being told the advice is against replacement, she should document the advice given, his reasons, and his instruction, then escalate to compliance before submission. She must not backdate documents, obtain blank signatures, or treat the application signature as proof that disclosure occurred. A verbal instruction does not waive her duty to explain; the client cannot consent to what he has not been told. The file should show what was disclosed, when, and how the client responded.
3. Six months after the replacement, Mr. Kamran complains that he did not understand the surrender loss and that the new policy's value is below premiums paid. Describe the conduct and regulatory risks for Ayesha and the insurer, and the factors a complaint reviewer would consider.
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The complaint raises mis-selling and churning risk: the sale appears driven by first-year commission and a superficial comparison, not by the client's needs. For Ayesha, the risks include breach of the insurer's code of conduct, disciplinary action, termination of appointment, commission clawback, and referral to the regulator if the conduct is serious or repeated. For the insurer, the risks include failure to supervise replacement business, inadequate disclosure controls, reputational damage, and a compensation or remediation order.
A reviewer would examine the fact-find, affordability analysis, replacement comparison, signed disclosures, free-look notice, and the timing of the sale. They would ask whether the old policy was suitable, whether the client understood the Rs 245,000 gap between premiums paid and surrender value, whether charges were explained, and whether he had time to reconsider. They would also consider whether Ayesha had a conflict of interest and whether the insurer's replacement review flagged the case. If disclosure was inadequate, remediation may include compensation for identifiable loss, re-training, or reinstatement discussions with the old insurer where possible. The outcome should turn on the documented advice, not on the client's signature alone.