Recommendations

A critical step in the sales process is the presentation of the agent’s recommended course of action. Two primary ethical considerations are the suitability of the recommendation to the client’s needs and a balanced disclosure of risks and benefits.

The only ethical recommendation an agent can make is one that is “suitable” for the client. The NASD’s “Rules of Fair Practice” — which apply directly to sales of variable insurance products (as they are considered “securities”) — require that any recommended securities transaction be suitable in light of the prospect’s financial situation and needs. This same suitability standard should be applied to all financial transactions involving the agent and client.

Regardless of the nature of the recommended product, it needs to be referred to in terms that offer understanding. Agents should use general terminology to identify the recommended product. Calling a product by an unfamiliar name may result in its true nature being disguised — to do so intentionally is unethical.

When educating clients with limited financial knowledge, agents often explain the unknown in terms of the familiar. The ethical risk of an analogy is that it often leaves out more important information than it imparts, leaving the prospect with an incomplete and erroneous understanding.

All comparisons of insurance to alternative investment or savings vehicles must be approached carefully. To be balanced, comparisons should note all significant differences between the products — such as risks, guarantees, insurance coverage, tax features — and not simply rates of return.

A “balanced” comparison is one that compares all important features and examines the advantages and disadvantages of both products. It is obvious that the intentional misstatement of fact concerning a competing company or product would be unethical; it may be less obvious that the intentional omission of material information would also be unethical.

During the early phases of the sales process, agents should inquire as to the prospect’s tolerance for risk — financially and psychologically. The competent agent will understand the risk being taken by the prospect that implements a proposed strategy; often, however, the prospect’s awareness level is far below that of the agent.

To minimize the opportunities for misrepresentation of life insurance policies, the legislature passed the General Life Insurance Solicitation Law — Florida Statute 626.99. This act requires insurance companies to provide prospective purchasers with information regarding coverage, rates, and suitability to the purchaser’s needs.

Insurance companies must provide life insurance applicants with a “Buyer’s Guide” and a “Policy Summary” either:

Purchasers of fixed annuities receive a “Buyer’s Guide” and a “Contract Summary.” Fixed annuities must contain a provision for an unconditional refund for at least 10 days.

The Policy Summary titled “Statement of Policy Cost and Benefit Information” must contain, at a minimum:

• Name and address of the agent soliciting the application (or if no agent is involved, a means for the applicant to contact the company)
• Full name and address of insurer (or administrative office)
• A short descriptive title of the premium and benefits of the policy (e.g., “single premium whole life,” “five-year renewable term”)
• Annual premium payable for the basic policy and each rider (listed separately) for at least the first 5 years
• Guaranteed death benefits
• Cash surrender values and other policy benefits
• Effective interest rate on policy loans
• Projected dividend payments (and a statement that dividends are not guaranteed)
• Insurance cost index comparisons

“Buyer’s Guides” must be presented in a format similar to the model guide adopted by the National Association of Insurance Commissioners.