Dealing with cancellation requests

After going through the process of selling a life insurance policy, any financial advisor would be disheartened to have that client later request the cancellation of the policy. For various reasons, however, clients occasionally decide that a policy no longer fits within their financial plan.

Rather than simply accepting cancellation requests, ensure that your clients understand the repercussions of a decision to cancel a policy. Urge your clients to explore alternatives, both to protect the clients’ interests and to protect your practice from potential litigation.

“People have the impression that cancelling their insurance is no big deal,” says Jim Ruta, managing partner and vice president of global sales with InforcePRO in Mississauga, Ont., and a video columnist on www.investmentexecutive.com. “But you may be cancelling a policy that you will never be able to buy again.”

Ruta adds that advisors “can be held accountable in the event policies are cancelled and clients then say they didn’t understand [the implications].”

When you’re approached by a client who wants to cancel a policy, Ruta recommends arranging a meeting to find out why. “It really requires a visit, and it requires a talk,” he says. “You need to get some understanding of [the client’s] rationale.”

Depending upon your clients’ reasons, you may be able to help to find alternative solutions to cancelling the coverage. For example, if cost is the primary concern, you may be able to shop around for a policy with more affordable premiums or dial back the face value of the original policy’s coverage. Or, if a client’s marital status has changed, he or she may be able to change the beneficiary of the policy.

If clients are adamant about cancelling a policy, make sure they understand all of the repercussions. For example, clients might assume that they simply can purchase another policy if they decide they need to in the future, without realizing that the same coverage is likely to be considerably more expensive when they’re older. Also, depending upon the state of clients’ health, some clients may not qualify at all in the future.

In addition, the features on clients’ existing policies may be unavailable in future.

If the decision to cancel a policy seems questionable or uncharacteristic of a client, it’s important to ensure that client is acting with full capacity, says Harold Geller, associate with law firm McBride Bond Christian LLP in Ottawa.

“The advisor has an obligation to explore the client’s understanding to make sure the client is making an informed choice,” says Geller. “If there is any indication that the [client] may not be acting rationally – or acting without capacity or with limitations of capacity – then there is an absolute obligation to investigate further. You can’t take instructions from a client without capacity.”

Allison Graham, a consultant with ElevateBiz.com in London, Ont., and author of From Business Cards to Business Relationships: Personal Branding and Profitable Networking Made Easy, says that when clients’ capacity comes into question, you should involve a client’s family to ensure everyone is aware of the decisions being made. Graham learned the damaging impact of a policy cancellation when her father died at age 60 – after having cancelled his coverage without his family’s knowledge. He had been demonstrating unusual behaviour and was diagnosed with brain tumours.

“We don’t know what happened,” Graham says. “We just know that before he was diagnosed, he had life insurance that he had been paying for 25 years; and, by the time he died, he no longer had it.”

That decision meant that Graham’s mother did not receive any of the money that her husband originally had intended for her. Although Graham doesn’t know whether her father cancelled the policy through his advisor or directly with the insurer, she says the decision should have been questioned and the family should have been notified.

“I think it’s abnormal behaviour for a 59-year-old man who has paid for 25 years to, all of a sudden, cancel a policy that’s worth millions,” she says. “We should have been involved in the conversation.”

If you can establish that your clients have capacity, are aware of the consequences and still want to cancel a policy, there may be little you can do. “If the client then chooses to make a bad decision,” Geller says, “then unfortunately, that’s the way it is.”

In these situations, Geller advises, keep detailed records outlining the steps you take to ensure your clients have understood the implications of their decisions.

Ruta suggests having such clients sign a policy-cancellation waiver letter that indicates that they understand that: they’re losing the coverage; they’re making that decision despite having been advised against it; and were informed of alternatives.