A critical step in the sales process is the presentation of the agent's recommended course of action. The purpose of this step is to present to the prospect a solution to a need that he or she has admitted having. Often it includes a recommendation or presentation of insurance products. Two primary ethical considerations of this step are 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 overriding ethical issue with respect to product selection is that it must be suitable to the prospect's particular circumstances and the produce meets the client's needs. The National Association of Security Dealer'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 also be applied to all financial transactions involving the agent and client -- regardless of whether the recommendation involves a "security" or other financial products, such as insurance and annuities.
The second ethical consideration in the presentation step concerns how the product being presented is communicated to the prospect. Obviously, the product must be properly identified. 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. Annuities should be called annuities, not as a "retirement plans" or "or savings plans". Separate accounts of variable products should be identified as such, not as "mutual funds". Insurance products should be described as a means of protection, not as an investment vehicle.
Calling the product by a name that is unfamiliar to the prospect may result in its true nature being disguised. To do so intentionally is unethical.
Selling often involves educating the prospect has to how a the recommended product functions. When the client possesses only a rudimentary knowledge of financial products, this process is frequently done by explaining the unknown in terms of what the client already knows. While educating the client is a necessary step in the presentation, using analogies with other products to explain the recommendation may mislead the prospect. The ethical risk of an analogy is that it often leaves out more important information than it imparts. As a result, the prospect may have an incomplete and erroneous understanding of the product. For example, referring to the cash value of a whole life policy as a "savings account", overlooks the role of the cash value in determining the death benefits under the policy.
Another ethical concern is when terms used reference to insurance products have a different meaning when applied to non-insurance products. For example, a dividend on a participating insurance policy is in reality a rebate or refund of premiums paid by the policyholder. In other contexts, dividends are a return of profits earned by a corporation. To state that policy dividends are an "investment return" or to allow a client to believe that are misleading and unethical, for a couple of reasons: It misstates what a policy dividend truly is, and it mistakenly draws a parallel between insurance and securities.
All comparisons of insurance to alternative investment or savings vehicles must be approached carefully. Rarely are simple comparisons of past returns indicative of the differences between the products. To compare the rate of return on stocks to CDs, or taxable corporate bonds with tax-free municipal bonds is to see only part of the picture. To be balanced, comparisons should note the all of significant differences between the products -- such as risks, guarantees, insurance coverage, tax feature -- and not simply rates of return. A comparison that overlooks these features is, at best, misleading. The purpose of a comparison is to educate a client, so that he or she is better able to make a fully-informed decision. A fair and balanced comparison that details the pros and cons of each product along with a detailed examination of their similarities and differences is the only ethical way to do that.
Rarely does an agent represent the full range of insurance or investment products available in the marketplace. Clients may be approached by agents of competing insurers. Agents will often present the relative merits of competing products or sponsoring companies. The ethical imperative in such a comparison is that it must be balanced and complete. A "balanced" comparison is one that compares all of the important features of the products 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. The guiding ethical principal is that a comparison must include a comparison of all of the important features.
Statistics are often necessary and helpful when comparing products or companies; they must be substantiated and referenced whenever they are used.
During the early phases of the sales process, agents should inquire as to the prospect's tolerance for risk -- financially and psychologically. Prospects will vary substantially from one to the other in their risk-comfort levels. While many will avoid risky planning strategies, others will try to push the envelope as much as they can. When discussing the possible use of strategies or products that involve risk, the key ethical consideration for the agent is appropriate risk disclosure. 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. The agent's failure to advise the prospect of the risks inherent in the adoption of any recommended strategy is unethical and likely to expose the agent to the risk of a malpractice claim.
SPECIFIC FLORIDA LAWS AND RULES
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, and their agents, must deliver disclosure documents to clients when soliciting ordinary (individual) life insurance or fixed annuities. This law does not apply to variable annuities, variable life insurance, group life, credit life or policies issued to qualified retirement plans such as pensions, Keoghs, etc.
Insurance companies must provide life insurance applicants with a "Buyer's Guide" and a "Policy Summary" either:
(1) before accepting an initial premium deposit, or
(2) upon delivery of the policy, if the policy can be unconditionally canceled by the applicant within 10 days, with full refund of premium.
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", etc.,
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), and
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.