Life & Health Insurance Exam (National Portion)Ethics and SuitabilityMedium
A senior client, Mrs. Thompson, has an existing whole life insurance policy with a cash value of $50,000. Her agent suggests replacing it with a new index universal life (IUL) policy, emphasizing the potential for higher cash value growth and more flexible premiums. The agent does not clearly explain the surrender charges on the existing policy, the new policy's higher fees, or the potential for market-linked losses in the IUL. This scenario most clearly demonstrates a violation of which ethical principle?
- AFull Disclosure
- BNon-Discrimination
- CConfidentiality
- DPrivacy
Show answer & explanationAnswer & explanation
Correct answer: A. Full Disclosure
The agent failed to fully disclose all material facts related to the replacement, including the disadvantages of the new policy and the costs associated with surrendering the old one. This violates the principle of full disclosure.
Why the other options are wrong
- B. Non-discrimination refers to treating all clients fairly regardless of protected characteristics, which is not the issue in this scenario.
- C. Confidentiality is about keeping client information private, not about product disclosure.
- D. Privacy relates to protecting personal information, which is not directly violated here.
Full Disclosure (Replacements)
When replacing an insurance policy, agents have a fiduciary duty to fully disclose all material facts, including the advantages and disadvantages of both the existing and proposed policies, and any associated costs or penalties.
- Must explain potential loss of benefits from old policy.
- Must disclose new fees, surrender charges, and waiting periods.
- Must compare both policies fairly.
- Client must understand all implications before replacing.
Memory trick: Replacements demand Radical Transparency and Clear Communication.