LICENSEE STANDARDS. Life Insurance Advice. (including Replacement of Product Advice)

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1 LICENSEE STANDARDS Life Insurance Advice (including Replacement f Prduct Advice) Versin 1.0 Octber

2 OVERVIEW Advice relating t persnal risk insurance (bth attached t superannuatin and stand-alne) is a very cmmn strategy fr financial advisers. Many Australians will have sme frm f risk insurance, bth inside and utside the superannuatin envirnment, sme will have n current cver r are presently under / ver insured. Fr varius reasns, it may be suitable t recmmend the client take ut new insurance cver, alter their existing cver r replace their existing insurance plicy(s) with anther. This dcument has been designed t help when yu prvide insurance advice (including replacement f prduct advice) t retail clients fr their risk insurance plicies. It is imprtant that yu are aware f legislative advice disclsure requirements, that yu can demnstrate hw the advice will be fit fr purpse and hw the recmmended financial prduct and strategy will be in the client s best interests. ADVICE DOCUMENT REQUIREMENTS Recmmendatins shuld be based n the client s relevant circumstances, needs and bjectives and must at all times be in the client s best interest. The table belw explains sme f the key pints which must be addressed in a CDF and SOA when recmmending insurance advice. Requirements It is imprtant that there is sufficient infrmatin pertaining t the clients persnal and financial situatin, as well as clarity arund their insurance bjectives. The fllwing infrmatin shuld be clearly dcumented in either the client data frm (CDF) r file ntes: Data cllectin Has the relevant persnal and financial situatin been identified and dcumented? Fr example incme and expenses, assets and liabilities, general health details and s n. Have there been any changes in the clients health since taking ut previus plicies? Have relevant details f the clients existing insurance plicies been identified and dcumented, including any insurance the client may have within superannuatin?; Have yu identified the type and level f cntributins which are ging int the clients super fund, especially fr self-emplyed clients wh may have a small accunt balance and are nt required t cntribute int their fund? Have yu cmpleted an insurance needs analysis in full fr each client seeking insurance advice? Have lump sum figures been explained? Fr example - lump sum f $386,086 fr future expenditure is based n replacing incme f $50,000 fr 10 years based n a 5% rate f return; Are there sufficient file ntes which dcument client discussins and attitude t risk insurance? Have yu discussed and identified any client preferences fr certain features? Fr examples premium type, plicy definitins, ptinal benefits and s n. Have yu discussed with the client hw lng they intend t hld the plicy fr and has this been dcumented in either the CDF r file ntes? 1

3 It is the rle f the adviser t engage with the client t help them arrive at the right type f cver and sum insured that is apprpriate and affrdable t them ver time. This is the value add f persnal advice t a client. ASIC Reprt 413 identified a failure t cnsider the client s persnal circumstances and needs as ne key area assciated with pr advice. Best Interests Recmmendatins must clearly demnstrate hw the strategies and prducts meet the client s relevant circumstances, needs and bjectives. Yu must persnalise the strategy text and nt rely n generic statements t explain why the replacement advice is apprpriate. The reasns must link back t the client s bjectives and in particular relevant prduct features. Where there are statements made abut the features and benefits f the recmmended prduct, and there is n evidence (file ntes) that these are relevant t/valued by the client, the replacement advice may nt be apprpriate and in the client s best interests. It wuld be misleading t state the reasn fr switching is t access a certain feature r benefit where this feature r benefit is available in the existing prduct. Recmmending a mre expensive prduct than the existing, wuld nt be deemed apprpriate where the client s bjective was t reduce csts. Yu will be cnsidered t nt have acted in the client s best interest if yu recmmend a premium that is simply unaffrdable. Strategy/ prduct recmmendatins This sectin f the SA needs t dcument the fllwing: Clear reasning as t hw the recmmended prduct is meeting the needs and bjectives f the client; A clear link between the level f insurance recmmended in the SA and the insurance needs analysis cnducted at the data cllectin stage; Risks and disadvantages f the recmmended prduct; Details f plicies - all recmmended features and plicy definitins, including ancillary benefits need t be explained and justified within the SA. Fr example, TPD any/wn ccupatin; agreed/indemnity value incme prtectin; waiting perid and benefit perid; stepped/level premiums and s n; Ownership structure - the SA needs t clearly explain and justify the wnership and structure f the plicies. Fr example, persnally wned; within superannuatin, partial rllver, r split/linked cver. Plicy linking Where yu recmmend plicy linking, which will result in ne type f cver being reduced in the event f a claim f anther (e.g. TPD linked t life cver, in the event f a TPD claim the life cmpnent will be reduced by that amunt). Yu shuld clearly discuss the implicatins f this in the SA. The SA needs t include the fllwing warning: Warning: It is imprtant that yu d nt cancel any existing plicy(s) until the replacement insurance has been accepted by the insurer. Alternative Prducts The SA needs t include at least tw alternative prducts and prvide a brief summary as t why they were discunted. If there is replacement advice, the existing prduct must be cnsidered and dcumented as t why it is nt suitable. 2 2

4 There shuld als be evidence f the research cmpleted when cnsidering alternatives. This may be n the client file such as a Risk Researcher cmparisn r a central file where regular research f prducts is undertaken. Affrdability The SA must include an affrdability statement that demnstrates the premiums are affrdable bth inside and utside f superannuatin. Things t cnsider include: Frm Cash flw If the plicies are held in the client s name d they have sufficient cash flw surplus t cver the premiums nw and in the future (cnsider increasing csts fr stepped cver)? Des the SA include an affrdability statement r cash flw? Frm Superannuatin Is the accunt balance r regular cntributins sufficient t cver the premiums nw and in the future? Shuld the premiums be greater than 10% f the superannuatin balance r greater than Superannuatin Guarantee r regular cntributins, yu need t cnsider if the strategy is apprpriate and ensure yu recmmend strategies t cunter the impact f the insurance n the superannuatin balance. Where the insurance prduct is held within superannuatin, the adviser must describe the lng-term impact n retirement savings t help the client make infrmed decisins abut future superannuatin cntributins, cmpeting pririties, etc.. Always cnsider the lng-term affrdability f the strategy. A client will typically like t hld insurance fr a lng perid f time. Therefre, it is imprtant t demnstrate the insurance will be affrdable nt nly in the first year, but the fllwing years as well. Review & nging service If yu will be remunerated by way f an nging cmmissin r fee, it is imprtant that the SA reflects what services the client will be ffered / prvided in return fr the nging remuneratin. Where n nging service will be prvided r will nly be prvided at a cst, this must be dcumented and explained t the client within the SA. Disclsure Please ensure that the SA accurately disclses the insurance cmmissin payable, in bth % and $ terms. This sectin shuld clarify whether the premium quted is inclusive f stamp duty / plicy fees. 3 3

5 REPLACEMENT ADVICE FRAMEWORK AND GUIDELINES We define replacement advice as the recmmendatin t replace (in full r in part) ne financial prduct with anther financial prduct. In relatin t replacement advice, this guideline is nly lking at situatins where this is a like fr like replacement. Fr example: Cancel clients existing Life, TPD and incme prtectin (IP) with insurance prvider A and take ut new Life, TPD, trauma and IP with insurance prvider B (whilst the client did nt currently have trauma cver, there is still a like fr like replacement in relatin t Life, TPD and IP); Reduce clients existing Life cver with insurance prvider A and take ut new Life cver with insurance prvider B; Cancel and re-issue an insurance plicy frm stand-alne t inside a Superannuatin fund, r vice versa (including a SMSF). In many cases this will nt require a replacement table, hwever any lst benefits r cnsequences will be required t be disclsed (e.g. switching frm wn ccupatin t any ccupatin due t superannuatin restrictins r taxatin cnsequences due t change in wnership structure). The fllwing example is NOT replacement advice: Retain a client s existing Life insurance plicy and take ut a new Life insurance plicy with a new prvider. In these situatins, cnsideratin must be given t the existing cver as well as clearly addressing within the advice dcument why it was nt suitable t alter the existing cver in line with the recmmended amunt. It is als imprtant t nt ver insure the client in these situatins and as always demnstrate affrdability. If the advice is t cancel a client s existing life insurance plicy and take ut a new incme prtectin plicy, this wuld nt cnstitute a like fr like replacement. In situatins such as this, it is imprtant that the advice dcument clearly indicate the type and amunt f insurance that is being cancelled (and subsequently nt being replaced), the justificatin fr the cancellatin as well as detailing any ptential risks and disadvantages f lsing this cver. The fllwing table sets ut what advisers must cnsider befre recmmending prduct replacement f like fr like prducts. 4 4

6 Requirements Like fr Like Cmparisn Cnsideratin f Alternatives Cnsideratin f s29(3) f the Insurance Cntracts Act Benefits lst and cnsequences Cnflicts f Interest Cnsideratin fr existing prduct(s) Advisers must cnsider the client s existing prduct. This shuld be demnstrated in the Statement f Advice (SA) in a replacement table (see further in the dcument fr mre details). The replacement table shuld cmpare the csts and features f the fllwing: Existing prduct The recmmended strategy in the existing prduct The recmmended strategy in the recmmended prduct Advisers must nt recmmend a client replace ne prduct with anther that is mre expensive n a like fr like basis withut sufficient justificatin as t why the mre expensive prduct is better suited t the client s specific needs and bjectives. Where the replacement recmmendatins are driven by price savings, the adviser must discuss and demnstrate within the SA alternative strategies t assist with lng term affrdability. These cnsideratins may include: Level premiums Reduced levels f cver Remval f additinal ptins Advisers must ensure the client is aware f Sectin 29(3) f the Insurance Cntracts Act which allws an insurer t vid a cntract f insurance within the first 3 years f cmmencing the cntract fr life insurance, and may vary the cntract at any time fr ther insurance. This shuld be discussed and dcumented in the SA Advisers shuld take extreme care when recmmending replacement f insurance prducts that have been in place fr mre than 3 years and fr thse prducts in place prir t 28 June Advisers must clearly utline any lst benefits and significant cnsequences f replacing their existing prduct. This culd include lst benefits, recmmencement f the nn-disclsure perid, lst features etc. Advisers must demnstrate that they have placed the client s interests ahead f thse f themselves r a related party. Advisers must nt recmmend the adviser s preferred prduct where there is nt sufficient justificatin as t hw it better meets the client s bjectives. This may include aviding making statements as t hw the adviser prefers, r benefits frm the specific prduct unless there is a benefit t the client and it is aligned t their needs and bjectives. Advisers must nt actively recmmend switching clients frm ne insurance prduct t anther where the benefit t the adviser is greater than the benefit t the client. See ther cnsideratin sectin fr mre details The adviser must research the existing prduct which may include btaining a statement, PDS and/r third party authrity t cntact the prvider, and dcument these enquiries. Enquiries shuld be made int the fllwing regarding the clients existing insurance: Did the client g thrugh underwriting? Are there any ladings r exclusins attached t the plicy? Des the existing plicy have the capability t alter cver t the recmmended amunt f cver? If s, what is the updated premium fr the purpses f a like fr like cst cmparisn? Has the existing cver been in place fr mre than 3 years? If s, the nn-disclsure perid accrding t s24 f the Insurance Cntracts Act will need t be explained t the client and 5 5

7 dcumented in the advice dcument see ther cnsideratins sectin fr mre detail. Premium amunt and structure Is it unitised / decreasing cver r fixed? All ptins / benefits attached All relevant definitins / waiting perids etc. Stepped r level premiums The adviser must make a genuine effrt t get the infrmatin. This includes btaining a signed authrity frm the client t btain the required infrmatin frm the existing prduct prvider and als reviewing the existing prduct s PDS. If it is nt pssible t btain infrmatin, advisers shuld cnsider whether advice can be prvided that is in the client s best interests. The adviser shuld cntact Prfessinal Standards t discuss and the SA wuld need t include apprpriate warnings. Reasns fr switching Replacement Advice Advice will be cnsidered apprpriate if the net benefits that are likely t result frm the prduct t be acquired are better than the existing prduct that is being dispsed f r reduced. Additinal benefits btained frm a mre expensive prduct recmmendatin must be particularly relevant fr the client s circumstances. Where there are cst savings, the savings must verride the lss f benefits that are f value t the client. ASIC Reprt 413 identified weak ratinales fr prduct replacement advice as a key area assciated with pr advice. Please refer t the ther cnsideratins sectin fr tips arund replacement advice and reasns fr switching. The SA will need t include a sectin titled Prduct Replacement. The infrmatin shuld be clear and easy t understand. Therefre, a replacement table shuld be used. This sectin shuld include the fllwing pints: A cmparisn between the existing plicy, the recmmended strategy in the existing plicy, and the recmmended plicy inclusive f respective premiums; Cmparisn f relevant prduct features; Any ladings / exclusins; Features / benefits gained; Features / benefits lst; A like fr like nging cst cmparisn (where pssible)*; High level reasning fr prduct replacement; and Other significant cnsequences f replacing the prduct. See examples f like fr like cmparisns in the Other Cnsideratins sectin f this dcument. 6 6

OTHER CONSIDERATIONS Like fr Like Cmparisn In rder t place the client in an infrmed psitin, there shuld be a like fr like cmparisn indicating that if the client had retained their existing insurance

8 OTHER CONSIDERATIONS Like fr Like Cmparisn In rder t place the client in an infrmed psitin, there shuld be a like fr like cmparisn indicating that if the client had retained their existing insurance plicy and was altered in line with the recmmendatins, hw much wuld this cst? The table belw prvides a wrked example: *In limited situatins, yu may nt be able t prvide the client with an accurate like fr like cmparisn. This may be due t the fllwing: The existing insurance prvider is restricted in what it allws. Fr example, the advice may be t take ut Life and TPD n a level premium and fixed amunt f cver. Whilst the client has existing Life and TPD within an industry fund, it is n a stepped premium structure and is unitised / decreasing in nature and the prvider des nt allw fr level premiums. In situatins such as this, the cmparisn shuld attempt t prvide a csting f the existing cver if it were altered t an amunt as clse as allwable (based n unitised cver) t the recmmended amunts. The SA wuld subsequently explain that due t the restrictins within the existing prvider, a true cmparisn cannt be cnducted. Assuming the client was seeking a plicy which was nt unitised, this wuld assist in supprting the verall suitability f the replacement advice. Yu are unable t btain an accurate qute based n altering the existing cver t the recmmended amunt. In these situatins the adviser must make a genuine effrt t get the infrmatin and this includes btaining a signed authrity frm the client t btain the required infrmatin frm the existing prduct prvider, as well as evidence f cntacting the existing prvider fr a qute / cnducting qutes nline (i.e. btain an estimated qute frm a cmparisn sftware such as Cmpass). If it is nt pssible t btain a like fr like qute then the adviser shuld cnsider whether advice can be prvided that is in the client s best interests. If this is the case, it shuld be treated as if the new insurance cver will be mre expensive than the existing, and therefre clear ratinale t switch the plicies needs t be addressed. Please refer t Reasns fr switching previusly addressed within this dcument. 7 7

9 Tips fr prduct replacement Always research the existing prduct (e.g. cmparisn qutes with stepped vs level graphs) and cnsider if yu culd simply reduce/increase the sums insured with the current prvider. Include the existing prduct as ne f the alternative prducts yu have cnsidered. Is there the pssibility f maintaining the existing cver and then applying fr the increased amunt with anther prvider as a tp up? If this plicy has been in-frce fr mre than 3 years it will be utside f the nn-disclsure perid, therefre keeping the existing may reduce the risk f a claim being denied due t inncent nn-disclsure. Always include strng justificatin fr the replacement, particularly where the replacement plicy is mre expensive r nly slightly cheaper. Avid generic statements such as Insurer X has an excellent claims histry r Insurer Y has cmprehensive features at a cmpetitive price Research yur preferred prducts and ensure yu knw them extensively. Engage with the prduct BDMs t understand their unique qualities. If yu link yur replacement advice t a specific definitin (e.g. better heart attack definitin), ensure that this is a pririty f the client. Remember level premiums, agreed value, etc. are nt reasns fr replacement unless they are nt available in the existing. Tips fr insurance in superannuatin Cnsider the lng-term impact f the insurance premiums n the client s superannuatin balance and retirement (nt just the next cuple f years). What percentage f the super balance is the premium? Is it mre than 10%? Are there SG r regular cntributins being made t the fund? Is the premium mre than the cntributins? If s then ptentially recnsider sums insured r recmmend sme strategies t cunter the impact. Cnsider the impact f stepped premiums ver time. Is level premium a mre apprpriate ptin? Remember yu can have sme stepped and sme level. Cnsider annual premiums vs mnthly premiums t save csts. Cnsider strategic advice. E.g. Culd it be apprpriate t maintain the incme prtectin they already have inside super (30 day wait, 2-year benefit) and then apply fr a 2-year wait, t age 65 benefit utside super? Culd that als be mre cst effective and they can still claim a tax deductin fr the utside super cmpnent? 8 8

10 Tips t avid insurance nn-disclsure The Insurance Disclsure Warning must be included in each Statement f Advice r Recrd f Advice. Advisers shuld als make detailed file ntes f their discussins regarding the client s duty f disclsure and discuss the recmmencement f the nn-disclsure perid when replacing plicies. Advisers may als cnsider using the ptin Duty f Disclsure Acknwledgment Frm. Other tips include: Always dcument hw the infrmatin n the applicatin was cllected (highly imprtant with nline applicatins). Was it cllected ver the phne, face t face etc. Ask the client t review answers and keep a signed cpy f the applicatin even fr nline. Als dcument hw the infrmatin was cllected (e.g. face t face, ver the phne etc). Extreme cautin shuld be taken if transferring paper based applicatins t nline. Ensure yu check with the prvider as t their requirements and always refer back t the client if additinal questins are revealed. D nt rely n ut f date infrmatin r pre-fill in applicatin frms based n infrmatin n file Review previus applicatins. Were they previusly a smker and nw declaring as a nn-smker? Did they have mental illness previusly? Always discuss the client s duty f disclsure and the nn-disclsure perid and dcument the discussin. Include the warning in the SA and cnsidering using the ptinal declaratin frm. Always cnfirm with the client if anything has changed (financially r regarding their health) prir t cancelling existing plicies. Has the ptin f tele-underwriting been cnsidered? This can be a very efficient way f utsurcing the applicatin prcess and reducing the risk f nn-disclsure. QUERIES & FURTHER INFORMATION Additinal queries shuld be directed t yur lcal Prfessinal Standards Cnsultant r yu can PrfessinalStandards@cpal.cm.au 9 9

FINANCIAL SERVICES GUIDE Adams Triglone, Gregory Thomas Adams, Judith Anne Constantine

FINANCIAL SERVICES GUIDE Adams Triglne, Gregry Thmas Adams, Judith Anne Cnstantine Date: 8 December 2016 This Financial Services Guide ( FSG ) is prvided by: Adams Triglne ABN 29 551 448 187 (Authrised