Policy replacements

Policy replacements - Overview

Before suggesting the replacement or reduction of a policy or of a pending application, representatives must take the client's current and future needs into consideration, along with their objectives and financial situation. It is the representative's responsibility to disclose all the information needed so that the client has a good understanding of the product you are recommending and the impact of the proposed replacement on the original policy. Your objective is to ensure that the client's needs are met and that the client's best interests come foremost.

Representatives must provide clients with a written explanation of the advantages and disadvantages of replacing an existing life insurance policy, before starting an application for a new policy. When reviewing the written explanation, clients have the opportunity to ask questions that will help determine if replacing an existing policy is in their best interest.

In Quebec, a Prior notice of replacement form with all applicable areas completed, signed by both the policy owner and the representative, provides the proof the representative compared the features of the current policy and the proposed policy, as well as proof of the client's understanding of the transaction.

The client's current situation needs to be analysed when preparing the written explanation. The analysis of both the existing policy and the proposed insurance policy should include a review of:

  • the type (term, whole life, or universal life) of both the existing and proposed insurance policies
  • the suicide, contestable period, and contractual exclusions on both policies
  • the amounts the new policy will pay (death benefit, cash value, dividends)
  • cash value, loans, dividends, etc in the existing policy
  • any benefits or attached plans that may be lost
  • contractual cancellation charges that will be applied
  • guarantees on both policies
  • premium increases and premium guarantees

Other points that should be considered are:

  • the client's current health and whether or not a rating may be applied to the proposed policy
  • taxable policy gain when the existing policy is cancelled
  • preferential tax treatment on some older policies that may be lost

If the representative is aware that a client's existing policy may lapse or has lapsed, the benefits of keeping the policy in force or reinstating the policy must be discussed. The representative must try to ensure that all insurance contracts are maintained in effect, unless the replacement of the policy is justified as being in the interest of the purchaser or the insured; the representative who replaces the contract must demonstrate that the replacement is justified.

Quebec specific - Financial needs analysis (FNA)

At the time of any sale of insurance and before suggesting the replacement of an existing policy, the representative must complete a FNA of the insured or the policyholder. If the FNA suggests the client would be best served by replacing an existing policy, the representative must demonstrate in writing that the replacement is in the client's best interest by completing a Prior notice of replacement (“Prior notice”). In order to do so, the representative must gather all the facts, which means that the client's existing policies must be available for analysis and comparison purposes. The advisor must explain the proposal to the client and ensure that the client has a clear understanding of the situation.

  • Two forms, supplied by the Autorité des marchés financiers are available for replacements:
    1. Prior notice of replacement of life insurance policy;
    2. Prior notice of replacement of an individual disability insurance policy.
  • If you are a trainee, the replacement must be authorized by your training supervisor and the Prior notice must be countersigned by the latter.
  • The prior notice must in all cases be signed on the same day as the application for life insurance.
  • Where a replaced product is not the same type as that offered, the representative must complete a notice of replacement answering the following three (3) questions and give it to the client:
    1. How does the current contract fail to meet the client's needs?
    2. How will the proposed product better meet the client's needs?
    3. What disadvantages will the replacement involve for the client?
  • A copy of the completed form must be sent to the head offices of the insurer(s) who issued the contract(s) likely to be cancelled, by any means within five (5) working days, providing proof of the date of signing of the insurance proposal.
  • Make a photocopy of the Prior notice of replacement for your record.
What is considered a replacement?

A replacement occurs:

  1. Where the purchase of an individual life insurance contract is likely to result in termination, cancellation or reduction in benefits of another insurance contract. A reduction of benefits may include:
    • the use of significant cash values of an existing policy for the ongoing funding of a new policy;
    • changed to paid-up insurance or continued as extended term insurance or under automatic premium loan;
    • the loss of certain tax benefits;
    • converting a term insurance to a permanent insurance. A term conversion is a contractual right where a term insurance (policy or benefit) is being converted to a permanent insurance. In circumstances where a client's protection would be reduced, this would be considered a replacement.
      • Example: A client has a term insurance (policy or benefit/rider) with a face amount of $500,000 and wishes to convert to a permanent insurance of $300,000, and keep the remaining $200,000 term in force - it is not a replacement. However, if the $200,000 term were to be cancelled, it would be a replacement.

Quebec specific

In Quebec, an individual life insurance contract includes health insurance (long term care insurance, critical illness insurance, Personal health insurance and disability insurance.) In addition to #1 (above) a replacement in Quebec also occurs:

  1. Where a client's adhesion to a group insurance contract is likely to result in the termination, cancellation or reduction of benefits of an individual insurance policy.
  2. In certain situations where a person has coverage without an actual policy having been issued such as:
    • a signed insurance proposal for which:
      • the mode premium has been paid in full, by cheque;
      • the signatory of the proposal has given either a bank authorization or a written authorization to transfer funds from one policy issued by an insurer to another policy issued by the same insurer;
    • a signed insurance proposal providing for temporary coverage of not more than one year, for which the temporary insurance premium has been paid.

Where an insurer is prepared to issue a contract in accordance with the terms and conditions of the insurance proposal, but subject to payment of an additional premium, the representative must follow the replacement procedure before he obtains a similar contract without any additional or extra premium from another insurer.

What is not considered a replacement?
  • A replacement of an annuity, including an endowment contract.
  • An amendment made to an existing contract.
  • A replacement of group insurance, including creditor and bank mortgage insurance.
  • A replacement of a maturing life insurance or endowment policy, or an expiring life insurance policy.

Quebec specific

The replacement procedure does not apply to the replacement of an insurance proposal for which the premium has been fully paid but where the medical examination was not conducted within the period stipulated on the conditional receipt.

When replacing an annuity, including an endowment contract, or amending a contract, both a Financial Needs Analysis (FNA) and a comparison (before and after) must be made. The only impact of these two types of transaction not being considered a replacement would be that no notification to the insurer must be made and that no mandatory forms are to be used.

Replacements by other companies

When Sun Life Financial receives a Life insurance replacement disclosure form (Prior notice of replacement in Quebec) for a Sun Life Financial policy being replaced, the form(s) will be sent to the representative of Record as an attachment.

When you receive the Life insurance replacement disclosure form, the best practice is to contact your client and attempt to conserve the policy. Remember, completing a Life insurance replacement disclosure form, or in Quebec, a Prior notice form, while clearly indicating intent, is not authorization for an insurer to terminate a policy. Separate written authorization from the policy owner is required to terminate a policy.

Replacement disclosure form requirements by province

Use this chart to determine which replacement disclosure form to use. The province is the location where the new application is written.

You must give the client a written explanation of the advantages and disadvantages of replacing the policy. This explanation should be signed and dated by the client. Keep a copy in your files.

From a risk-based approach, Sun Life Financial requires a copy of the Life Insurance Replacement Declaration (LIRD) or the basic replacement disclosure form to be sent to us.

Province

What are your form options for replacements?

Is there anything else you need to know?

Saskatchewan, Manitoba

The Life Insurance Replacement Declaration (LIRD) form (4357-E) is the only form that is acceptable.

You'll need to ensure the contact information is printed on the back of the form.

As part of Sun Life's risk-based approach, please ensure a copy of the LIRD form is sent to head office.

Give the client a written explanation of the advantages and disadvantages of replacing the policy. Keep a copy of this explanation in your files.

Ontario

The Life Insurance Replacement Declaration (LIRD) form (4357-E) is the only form that is acceptable.

Review the LIRD with your client and complete a written analysis comparing the policies.

A copy of the signed LIRD form and written analysis must be:

  • kept in your files
  • given to the client, and
  • sent to the new insurer.

A copy of the signed LIRD form must also be sent to the existing insurer.

Alberta, British Columbia

The Life Insurance Replacement Declaration (LIRD) form (4432-E) is the only form that is acceptable.

As part of Sun Life's risk-based approach, please ensure a copy of the LIRD form is sent to head office.

Give the client a written explanation of the advantages and disadvantages of replacing the policy. Keep a copy of this explanation in your files.

Nova Scotia, Newfoundland and Labrador, New Brunswick, Prince Edward Island, Yukon, Northwest Territories, Nunavut

The Life Insurance Replacement Declaration (LIRD) form (4357-E) or the Life Insurance Disclosure form are acceptable.

As part of Sun Life's risk-based approach, please ensure a copy of the LIRD form is sent to head office.

Give the client a written explanation of the advantages and disadvantages of replacing the policy. Keep a copy of this explanation in your files.

Quebec

Prior notice of replacement form must be completed.

 

Contact: Qualbus@sunlife.com