Life & Health Insurance Exam (National Portion)Ethics and SuitabilityMedium
An insurance producer is reviewing a client, Mr. Henderson's, current financial situation. Mr. Henderson, 68, has a modest fixed income and limited savings. He expresses a strong desire to leave a substantial inheritance to his grandchildren. The producer suggests a complex variable universal life insurance policy with significant investment risk and high premium payments. Which ethical principle is primarily violated by this recommendation?
- AEthical Error Correction
- BFiduciary Duty to Disclose Commissions
- CDuty of Utmost Good Faith
- DSuitability of Recommendations
Show answer & explanationAnswer & explanation
Correct answer: D. Suitability of Recommendations
The producer's recommendation of a high-risk, high-premium policy to a client with a modest fixed income and limited savings is unsuitable for his financial situation and objectives. This directly violates the principle of suitability.
Why the other options are wrong
- A. Ethical error correction applies after an error has been identified; the issue here is the initial recommendation itself.
- B. While important, commission disclosure is not the primary ethical violation in this scenario, as the core issue is the product's appropriateness.
- C. Utmost good faith is a broad principle, but suitability is the specific aspect being violated by the inappropriate product recommendation.
Suitability in Insurance
The ethical and regulatory requirement for insurance producers to recommend products that are appropriate for a client's financial situation, needs, and objectives.
- Considers client's income, assets, existing coverage, and risk tolerance.
- Protects consumers from inappropriate or detrimental product recommendations.
- Is a cornerstone of ethical sales practices in insurance.
Memory trick: Always Fit the Policy to the Pockets and Plans.