What advice can you offer your old whole of life clients?
Russell Hutchinson looks at the vexed question of what insurance advisers who are RFAs can do with clients with whole-of-life policies.
Monday, August 15th 2011, 12:02PM 
10 Comments
by Russell Hutchinson
Most Registered Financial Advisers (RFAs) have figured out that clients with whole of life policies issued before 1 January 2009 can be retained. But what, exactly, can you tell those clients?
Obviously you cannot talk to them about increasing their contracts - as that would be the sale of an addition to a category one contract - in fact, usually a separate contract altogether, clearly a category one product, and that would require you to be an appropriately qualified AFA. But what about other servicing tasks?
Mostly these contracts are being retained for two reasons: either they are so old that they are now accumulating bonuses quite quickly, and so to cancel them would cut off a good return on the next year's premium, or alternatively the life insured has medical reasons for retaining the cover, whatever the cost.
But both of these questions relates to the critical question of whether or not to dispose of the contract. Advice on disposal of the contract could constitute new advice, not merely servicing the old contract, and would therefore be a service on a category 1 product. For that you also need to be an appropriately qualified AFA.
You can answer some basic factual questions and conduct some policy administration. Examples include: reporting the current policy surrender value to a client, or recording a change of address. You may add or remove term riders which have no cash value, or would have a cash value that is less than the sum of the premiums paid (i.e. riders or contracts with a return of premium or partial return of premium provision).
But you may decide that the restrictions are just too tough.
If so, you might want to consider referring those clients to someone authorised to offer advice on the issue of disposal (likely to be the most common reason for the referral).
That being the case, you will want to apply some tough criteria to selecting the adviser you choose. I've laboured the point about someone appropriately qualified - few AFAs understand the background to whole of life products and can understand both their weaknesses (and the reasons why they are rarely sold today) while also recognising their strengths, and specifically the factors to consider before recommending that an individual surrender the contract.
If you can't find someone in your area who is up to the task then get authorised, and specialise in that segment.
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Comments from our readers
1. A universal life or whole of life contract issued prior to 1 Jan 2009 is cat 2 - therefore you could advise disposal for example. I rather sloppily said that advising disposal could constitute new advice on a cat 1 product. I am sorry, that is wrong. If you confined yourself to suggesting they surrender the policy, it looks fine.
Of course, you would get into trouble if you said 'you would be better off investing your money over here...' which is plainly new advice on some other contract or investment. That's the risk - it's where the conversation about disposal takes you.
2. There are differences between products. Most whole of life products would require that an increase is issued as a new contract - hence, you could not make a recommendation to increase in practice, even if you can in theory, without it being advice on a category 1 product.
Two examples may help:
If a discussion was taking place about whether to transfer a whole of life policy captured under the Category 2 policy definition (issued before 1 January 2009) into an endowment policy, I think it would be reasonable for this to continue to be regarded as a Category 2 product, provided it was done as a variation to the WOL policy *under the same policy number*. However, I consider it unlikely that this could be argued to apply if the endowment policy was issued under a new policy number, which in my experience is the practice. Perhaps this is crazy, as the outcome is the same, but that is how I see it.
The second discussion involves the taking up of a continuation option under a term life policy (a Category 2 product), converting it to a whole of life or endowment policy. Again, I would argue that it would be reasonable for this to continue to be regarded as a Category 2 product, provided it was done as a variation to the term policy under the same policy number. However, I consider it unlikely that this could be argued to apply if the new WOL or endowment continuation policy was issued anew under a new policy number. Again, perhaps this is crazy, as the outcome is the same, but that is how I see it.
4. There is an allied decision-tree which goes through all of this plainly which you may down load from here:
http://www.chatswood.co.nz/moneyblog/2011/08/life-.html
Perhaps what that all underlines is how complicated it is!
But besides all that, you should probably seek proper legal advice if you want to be sure :-)
Best wishes,
Russell Hutchinson
I think with your post-article comment you have nearly covered it. The one small point that I would contribute to the discussion - for the purpose of wider understanding for all of us of how the law will work in this respect - is "who" this interpretation applies to.
It is easy enough to simply say it applies to RFA's, but is it truly that simple? My own interpretation (which I will happily accept as potentially being my own Mea Culpa moment) is that the intent of the law is to provide relief to RFA's working with an pre-existing book of business.
So it seems clear enough that RFA's with Cat 1 products on the books they provided to their clients pre-December 2008 can actually still advise on those products.
What if you are an RFA who purchased a book this year, which contains some of those contracts, but which you personally did not service or advise upon pre-December 2008?
This is the little grey area for me - does the "exemption" apply only to your own clients you previously advised upon, or just any contract you happen to trip across that was issued before December 2008, despite your authorisation status?
If I had more hair, I would pull it out as this shows how poorly we advisers are treated by some product providers. They show little respect to the very people that provide them with their future business by failing to teach their staff what is, and what isn't a Category 1 product.
The legislation is black and white."Life insurance policies, within the meaning of S2(1) of the Securities Act 1978 issued before 1 January 2009" are Category 2 products and an RFA can give advice on such products.
This section has the effect of exempting Whole Life, Endowment and annuities issued before 1 January 2009. It matters not if you wrote the business or "trip across" it, an RFA can give advice if they are competent and skilled to do so.
What isn't as clear is the definition of "An investment contract of insurance" which was amended prior to the regulations being passed recently.
It just remains a NAGGING little question in my mind though, and one which I would dearly love to some clarification on by way of guidance note to the market or somesuch. The reason why it gnaws away in the back of my mind is that I am mindful of a series of discussions I had with various parties during the drafting of the legislation, and I am fairly certain of what the intent was. The actual wording appears to have created wider scope than the original intent for some products to be automatically included as Category 2.
Don't get me wrong, I am 100% fine with it. I hope indeed it is the case if and when some issues get tested.
Ron: perhaps that supplier you referred to needs to bring in an expert to clarify how to apply the wording....I know some people who would be good at that...lol...
If I as an RFA have an old whole of life paying good bonuses and I decide of my own volition to increase it, am I guilty of giving myself unauthorised advice and thus breaking the law. With younger AFA's not necessarily understanding how WOL policies work, shouldnt competency with the product be the benchmark?
I left the company a few months after this and headed down under to a new life in Godzone and was staggered to learn 5 or so years later the company I had worked for were held liable for my supposedly 'bad' advise to myself. The penalty imposed by the regulators? They had to make an ex gratia payment into my pension plan!
I can only hope that we do not get the same levels of legislative madness here in New Zealand; whilst I am hopeful I am certainly not going to hold my breath.
I left the company a few months after this and headed down under to a new life in Godzone and was staggered to learn 5 or so years later the company I had worked for were held liable for my supposedly 'bad' advise to myself. The penalty imposed by the regulators? They had to make an ex gratia payment into my pension plan!
I can only hope that we do not get the same levels of legislative madness here in New Zealand; whilst I am hopeful I am certainly not going to hold my breath.
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