The great majority of those selling long-term care insurance strive to always conduct themselves with honesty, integrity, fairness, and professionalism, and with a sense of duty to those they serve. In doing so they are guided by their own sense of right and wrong.
But LTCI products are complex, and many different situations and circumstances may arise. Consequently, as important as a strong moral compass is, it is not always sufficient to ensure that one acts in every instance in accordance with established rules of ethical conduct -- these rules must be learned. In addition, each state has laws and regulations that govern the sale of LTCI products, both partnership and nonpartnership policies, and insurance agents and brokers must be familiar with these requirements.
In this chapter we will explore some general ethical principles and how they apply to LTCI sales, and we will review the main regulatory requirements that must be complied with during the sales process we will end this discussion with a detailed exploration of the suitability of partnership and nonpartnership LTCI policies.
General Ethical Principles in Insurance Sales
An LTCI sales professional must disclose to her clients the information they need to make informed decisions. She must tell them about the disadvantages as well as the advantages of the products and services she recommends, and she must inform them of all costs. She should also disclose to them her own interest in any transaction. For instance, if she will receive a commission for the sale of an LTCI policy, she should let the purchaser know this.
An LTCI professional must maintain the confidentiality of personal and financial information provided by a client. She may not share this information with others unless two conditions are met:
• The person receiving information needs it to perform a legitimate and appropriate business function (as when data is passed to an insurance company underwriter).
• The client gives his informed consent -- that is, the salesperson explains to the client how the information he provides will be used, and the client agrees to this use. The client must give his consent in writing.
A salesperson must also make a reasonable effort to ensure that personal and financial information is not accidentally revealed to others. She should not leave applications, correspondence, and similar documents in open view, and she should take precautions to prevent sensitive conversations from being overheard. Finally, a salesperson must comply with all state and federal privacy regulations.
An LTCI professional has the responsibility to serve her clients with competence. Competence requires knowledge -- a salesperson must be familiar with a broad range of LTCI products and have a thorough understanding of the features and provisions, the benefits and costs, and the advantages and disadvantages of each.
An LTCI professional must also have some knowledge of the other means of financing long-term care discussed in this course, and she should understand the implications long-term care insurance has for taxation, financial planning, retirement planning, and estate planning. But at the same time, she has an ethical obligation not to go beyond the bounds of her competence when advising clients. A salesperson who is not also an attorney, accountant, tax expert, financial advisor, or estate planner must always bear in mind her lack of expertise and credentials in these fields. While she can do her clients a service by alerting them to issues and concerns in related areas that they may want to explore, it would be inappropriate for her to offer specific advice in these areas.
An LTCI professional must exercise diligence in serving her clients. She must take all reasonable steps to meet their needs and obtain necessary information and explore potential solutions.
Finally, an LTCI professional has the obligation to recommend a product that is suitable for her client. Suitability means that the policy design, benefit amounts, selected options, and costs match the circumstances, needs, goals, and financial resources of the purchaser.
To ensure that a policy is suitable, a salesperson must exercise diligence and competence. She must make a systematic effort to obtain all pertinent information about a client's personal and financial situation and his concerns and goals. She must then use her knowledge of LTCI products and other approaches to find the best solution for the client. A salesperson must not simply get a general sense of a client's situation and recommend a product that "seems about right."
And of course, a salesperson must not knowingly and deliberately recommend a product that does not meet a client's needs. She must not sell long-term care insurance to a person for whom it is not appropriate, and she must not recommend a policy with more or fewer benefits than the purchaser needs.
She must also not engage in churning or twisting. Churning and twisting occur when a salesperson, simply to earn a commission, sells a new policy to someone who already has perfectly suitable coverage.
Suitability is discussed in greater detail later in this Chapter.
Certain activities violate one or more of the ethical principles discussed above and are legally prohibited in the sale of long-term care insurance. Some of the most important are the following:
• Misrepresentation -- in selling a policy, an agent must not misrepresent any material fact (a fact that the consumer will likely take into account in making her decision).
• Cold lead advertising
occurs when an insurer's advertising or sales method initially conceals that its purpose is to sell insurance. Any marketing method must disclose in a conspicuous manner that its aim is the sale of insurance and that contact will be made by an insurance agent or insurance company.
• High-pressure tactics refer to actions having the effect of inducing the purchase of insurance through force, fright, threat (whether explicit or implied), or undue pressure.
• Churning and twisting are described above in relation to suitability.
Ethical and Legal Obligations in the Sales Process
During the process of selling an LTCI policy, an agent must fulfill certain ethical obligations, and certain actions are legally required or prohibited. We will review the most important of these in this section.
The Sales Interview
In a sales interview with a client, an agent has four main ethical obligations:
He must educate the client. He should explain in some detail what long-term care is and when it is needed and describe the various services and settings. He must give the client accurate information about the likelihood of a person needing long-term care, the cost of services, and projected future costs. He should discuss the ways people expect to pay for long-term care (savings and assets, Medicare, Medicaid, and long-term care insurance), making clear the limitations and advantages of each.
• After ascertaining that the client is not uninsurable for LTCI, he must determine whether LTCI is suitable for her and help her decide whether buying a policy is in fact the best course of action for her. This involves fact finding, the process of obtaining information from the client needed to do a rough analysis of her current income, expenses, and assets; projected future income, expenses, and assets; and circumstances, needs, goals, and preferences. Although this part of the interview usually begins conversationally, with the agent asking the client general questions about her situation and needs, the agent also normally fills out a standard fact-finding form issued by the
• If the agent determines that LTCI is suitable for the client, and the client decides she wants it, it is the agent's duty to work with her to tailor a policy that best meets her needs and circumstances. He must help her understand the choices she must make in regard to the daily or monthly benefit amount, the lifetime maximum benefit, the elimination period, inflation protection, and optional features. He must make clear the advantages and disadvantages of various choices, as well as the impact on the premium amount.
• Finally, once the client is ready to apply for a policy, the agent must make sure that she understands how the policy will work. He must review such potentially troublesome issues as what must occur for the insured to be eligible for benefits, how long she will have to wait for benefits to begin, how benefits will be paid, when benefits will run out, and in what circumstances the premium might be increased.
Also, during the interview the agent should provide information about the insurance company offering the policy, including its financial strength and stability, as reported by rating agencies such as A. M. Best, Standard & Poor's, Moody's, and Weiss; any past premium rate increases; and the experience of the agent's other clients in filing claims.
Completing the Application
An application for insurance is a legal document -- it is the prospect's offer to enter into a contractual arrangement with the insurer, and the statements she attests to in the application become part of the insurance contract. The application is long and complicated, so the agent generally assists the client in filling it out, and in doing so, it is his responsibility to ensure that it is fully and accurately completed. He must do his best to make sure the client understands what is being asked, answers honestly and as completely as possible, and is comfortable with her answers. The agent must of course not try to coach or influence the applicant to supply the "right answers" that will lead to the acceptance of the application and a sales commission for the agent, and he must not include any false or misleading information on the application.
Along with the application, a salesperson generally submits to the insurer an agent's report, in which he provides any pertinent information he has about the client that is not included in the application. It is unethical for an agent to purposefully fail to disclose or distort information in this report in order to gain acceptance and a commission.
At the time of application, the agent is required to give the prospect an outline of coverage and a copy of the NAIC Shopper's Guide to Long-Term Care Insurance (or in some states a similar state-issued guide). Some states also require that other disclosures and receipts be given to the prospect.
The laws and regulations that govern the sale of insurance in general and long-term care insurance in particular vary from state to state. But as discussed in Chapter 3, the NAlC Long-Term Care Insurance Model Law and Model Regulation have been adopted, in whole or in part, by most states, so the market conduct provisions of these models provide a good sense of the rules that generally apply. Some of these provisions have been mentioned above, but we will summarize the main ones here:
• A salesperson must give a prospect an outline of coverage and a shopper's guide to long-term care insurance, either the one developed by the NAlC or one issued by the state.
• The application for insurance must be clear and understandable by the consumer.
• The application must disclose the insurer's right to contest the policy if the applicant makes false statements on the application. (Contestability was discussed in Chapter 4 as part of the DRA requirements for PQ policies.)
• The policy must include a 30-day free look provision.
• The insurer must have procedures that ensure fair and accurate policy comparisons (to prevent churning and twisting) and prohibit the sale of excessive coverage.
In addition, many states have regulations intended to prevent the use of misleading advertising in the sale of LTCI. Some states require that certain guidelines be followed in the design of advertising materials, and many require that such materials be reviewed and approved by the state insurance department before use.
Advertising materials are defined broadly to include letters to prospective clients, sales presentations, and information published in any form (newspapers, Internet, radio or TV commercials, direct mail or point of sale brochures, lead generation dialog, etc.) that will be used to solicit buyers or recruit agents.
Some states also require all salespeople to complete training in ethical market conduct.
Documenting Ethical Conduct
An insurance salesperson should maintain a file for each client containing certain documents, notes, and information, including:
• the fact-finding forms she completed with the client;
• a record of the decisions made by the client during the tailoring of the policy, along with the reasons for these decisions;
• a record of any recommendations she made that the client accept, along with his reasons;
• the rate quotes she showed the client;
• a copy of the application and cover letters to the underwriters;
• any notes she made on the client's needs and concerns;
• copies of her correspondence with the client; and
• notes on any telephone conversations she had with the client or the client's family or other advisors. (These should include the date and time, the persons participating, and the content of the call.)
In addition, if a client's application is accepted but he decides not to take the policy, detailed notes on his reasons should be included in the file. (Some insurers even require a written statement from the client, signed and dated, declining the specifically named insurance policy.) Finally, if a client allows his policy to lapse, his reasons for doing so and any efforts on the part of the salesperson to maintain coverage should be documented.
If a client, his family, the insurance company, the state insurance department, or the courts question the salesperson's dealings with the client, or if a complaint or lawsuit is brought, the contents of the file can serve as evidence that the salesperson competently and diligently worked to provide the client with a suitable product, made all required disclosures, maintained the confidentiality of information, and otherwise adhered to ethical standards. If a salesperson is in doubt about what documents should be retained, she should consult with the insurer she represents.
The great majority of insurance agents do their best to always act in an ethical way and comply with all requirements. But unfortunately it can occur that a client or a client's family members accuse an agent of negligence or improper conduct, and in some cases they may file a complaint or even bring a lawsuit. As a result, an agent may see his professional reputation compromised, and he may have to pay legal fees or even substantial legal damages. When this happens, a person's career, business, and personal assets can be put at risk.
Errors and omissions (E&O) coverage addresses this risk. It can provide an agent with access to experienced legal counsel to fight charges and clear his name, and if an adverse legal decision is made, it can provide funds to pay claims. Agents can obtain E&O coverage through the insurer they represent or a professional association. All agents should keep in mind the following:
• E&O coverage is essential for the protection of an agent's business and assets.
• For E&O coverage to apply, an agent must comply with certain rules, so he must be familiar with these rules and adhere to them.
• An agent should periodically review coverage amounts and make sure they have not been outpaced by inflation.