Ethics, Principles and Professional Practice – Lecture Review

Question-and-answer flashcards covering key legal, ethical, regulatory and contractual concepts from the lecture on Ethics, Principles and Professional Practice.

When a renewable life insurance policy is renewed, what happens to the premium and face value?

The premium increases (because the insured is older) while the face value stays the same.

How can Canadian insurance companies be incorporated?

Either federally (can operate nationwide) or provincially (can operate only in the province of incorporation).

Which body converts insurance-related laws into industry rules in Canada?

The Canadian Life and Health Insurance Association (CLHIA).

Who owns a mutual insurance company?

Its policyowners.

Who owns a stock insurance company?

Shareholders who hold freely-traded shares.

Which federal office monitors insurers’ ability to meet their obligations?

The Office of the Superintendent of Financial Institutions (OSFI).

List the four legal requirements an individual must meet to sell insurance in Canada.

1) Hold a valid licence; 2) Have an agency contract with an insurer or MGA; 3) Adhere to the highest conduct standards; 4) Carry errors-and-omissions (E&O) insurance.

What federal statute regulates federally-incorporated insurers?

The Insurance Companies Act.

Why does Quebec have a different insurance act from other provinces?

Because Quebec is governed by civil law, whereas the other provinces follow common law and share a Uniform Insurance Act.

Which acts govern the marketing of life insurance products?

Provincial insurance acts (enforced by provincial regulators).

Under what branch of law are life-insurance contracts enforced?

Contract law.

What kind of insurance covers agents against tort claims for professional mistakes?

Errors and omissions (E&O) insurance (does NOT cover criminal acts).

What consumer-protection organisation guarantees benefits if a life insurer becomes insolvent?

Assuris.

Define a voidable contract in insurance.

A contract that the wronged party may choose to set aside (e.g., contracts with minors).

Differentiate between a mutual mistake and a common mistake in contracts.

each party misunderstands the other’s intent vs both parties share the same incorrect assumption about a fundamental fact.

What three elements are necessary for a valid insurance contract?

1) Offer (application) 2) Acceptance by the insurer 3) Consideration (premium) from the applicant.

Is an accidental wrong date of birth on an application a mistake or misrepresentation?

A mistake (no intent to deceive and no benefit to the applicant).

What is constructive notice in insurance agency law?

Information given to an agent is deemed to be received by the insurer.

What is a material misrepresentation?

Omitting or misstating a fact that would cause the insurer to decline or rate the policy differently (e.g., hiding a sky-diving hobby).

What is the contestable period for most life policies?

The first two policy years.

What happens if material misrepresentation is discovered during the contestable period and the insured dies?

The insurer may deny the death benefit (unless required premiums are refunded).

How is misstatement of age treated once discovered?

Benefit is adjusted to the amount obtainable for the premiums paid at the correct age; the policy is not voided.

When must insurable interest exist in a life-insurance contract?

Only at policy inception.

What does it mean that life-insurance contracts are unilateral?

Only the insurer is legally bound to perform (pay claim) as long as premiums are paid; the policyowner may cancel at any time.

Who are the two parties with contractual rights in a life-insurance policy?

The insurer and the policyowner (who may or may not be the life insured).

What happens if there is no insurable interest between applicant and life insured?

The insurer will refuse to issue the policy.

Define a third-party life-insurance contract.

A contract where one person (owner) buys insurance on the life of another person (life insured).

Name the two main types of joint-life contracts.

Joint-first-to-die and joint-last (second)-to-die.

If both insured and beneficiary die in the same event, how is payment handled?

If deaths occur together or within 30 days, the beneficiary is deemed to have died first; proceeds go to the insured’s estate.

Does a new will override an existing life-insurance beneficiary designation?

No. The policy’s named beneficiary normally prevails over will instructions.

List two disadvantages of naming the estate as beneficiary.

1) Proceeds may be subject to probate fees. 2) Loss of creditor protection.

If spouses divorce, what happens to an ex-spouse named as beneficiary?

Except in Quebec, divorce does NOT alter the former spouse’s rights as beneficiary unless the designation is changed.

Who controls the decisions on a life-insurance policy?

The policyowner (may assign, borrow, change beneficiaries, cancel, etc.).

CLHIA guidelines allow disclosure of client information under five circumstances. Name two.

Any two of: 1) With client consent; 2) Required by law; 3) Necessary to determine eligibility; 4) To protect insurer from fraud; 5) In discharge of a public duty.

How often are most group life contracts renewed and by whom?

Annually; renewal is the responsibility of the policyowner (employer/association), not individual members.

What unfair practice is violated when a lender requires insurance purchase to obtain a loan?

Tied selling.

Give three reasons fiduciary duty exists for an insurance advisor.

Clients rely on advice; confidentiality is owed; advisor must act honestly, skilfully, and in good faith while maintaining records.

What professional standard is breached if two colleagues share confidential income data about a client?

Violation of privacy and confidentiality standards.

Name the four pillars of Canada’s financial system.

1) Insurance companies 2) Banks 3) Trust companies 4) Investment dealers.

Identify the three principles underlying ethical conduct for life agents.

Know Your Client (KYC), Fiduciary responsibility, Privacy & confidentiality.

List the three predictable financial risks life insurance products address.

Losses due to death, disability, or old age (longevity).

May a life agent share commission with an unlicensed person?

No. Commissions can only be split with another licensed life agent.

What unfair trade practice involves exploiting authority over a client or employee?

Undue influence.

Why can’t an agent advertise herself as a 'top agent' based on sales?

Referencing sales results in advertising constitutes misrepresentation under the Code of Ethics.

Define twisting in life-insurance sales.

Inducing a client to surrender or lapse a policy to purchase another, to the client’s detriment and the agent’s benefit.

Is replacing a group policy with an individual policy automatically twisting?

No. Replacement rules usually do not apply when an individual contract replaces group coverage if it serves the client’s best interest.

What unfair practice is offering part of the premium back to close a sale?

Premium rebating (prohibited).

How does E&O insurance protect clients?

Ensures funds are available to satisfy a valid claim against an agent for professional negligence.

Define an agency relationship in insurance.

A legal relationship where a principal (insurer) authorises an agent to act on its behalf.

Who licenses insurance agents in Canada?

Provincial and territorial insurance regulators.

On what ground could an elderly person’s contract be challenged if they lacked comprehension?

Lack of legal capacity to contract.

At what age does provincial legislation generally allow individuals to contract for life insurance on their own behalf?

Age 16 or older.

What document allows someone to manage another’s financial affairs after incapacity?

An enduring (continuing) power of attorney.

Are life-insurance proceeds payable to a spouse protected from estate creditors?

Yes, they are generally statutorily protected when a preferred (family-class) beneficiary is named.

Define a tort.

A civil wrong causing loss or harm, creating liability for the wrongdoer.

What is a limitation period?

The legally specified time within which a civil action must be filed after discovering a cause of action.

Which federal statute governs privacy of customers’ personal information held by insurers?

PIPEDA – Personal Information Protection and Electronic Documents Act.

Before cold-calling prospects, what list must agents consult?

The National Do-Not-Call List (DNCL).

When must an agent report a suspicious transaction to FINTRAC?

Within 30 days of first forming the suspicion.

What is the FINTRAC cash threshold that triggers identity verification for a lump-sum premium payment?

Cash transactions of $10,000 or more.

What is Assuris’ protection level for death benefits if an insurer fails?

Up to $200,000 or 85% of the promised death benefit, whichever is higher.

What is the purpose of the IAIS Insurance Core Principles?

Provide globally accepted standards for effective insurance supervision.

Differentiate 'principles' from 'rules' in codes of conduct.

Principles guide desired behaviour (e.g., act with integrity); rules prohibit specific misconduct (e.g., no forgery).

Name the three components of acting in good faith.

Duty of care, Integrity, Competence.

What constitutes holding-out improperly as an agent?

Misleading the public about one’s qualifications, licence status, or services.

Define churning.

Replacing a client’s policy primarily to earn new commission, harming the client.

What is 'fronting' in insurance sales?

Submitting business in the name of a licensed agent when it was solicited by an unlicensed person.

Give an example of 'inducing to insure.'

Offering lavish gifts or payments to persuade a client to purchase a policy.

What is the primary goal shared by insurance regulators?

Protect the public interest and maintain confidence in the insurance sector.

What is a risk-based regulatory approach?

Focusing oversight on insurers and practices that pose higher risks to consumers.

Which body administers the national independent complaints service for life and health insurance?

OmbudService for Life and Health Insurance (OLHI).

Explain tied selling.

Making the sale of one product conditional on buying another product or service.

What are the four main public pillars of Canada’s retirement income system?

OAS, GIS, CPP/QPP, and provincial social-assistance programs.

Which public program provides income support to unemployed Canadians while they seek work?

Employment Insurance (EI).

What is an inter-vivos trust?

A trust created by a settlor during their lifetime.

Who is a trustee in a trust arrangement?

The person or entity holding legal title to trust property and managing it for beneficiaries.

What does 'payment into court' mean for an insurer facing competing beneficiary claims?

Depositing the policy proceeds with the court to discharge liability while claimants’ rights are resolved judicially.

What is the 'free-look' (rescission) period on new life policies?

10 days after delivery to cancel and obtain a full refund.

When can an insurer void a policy for suicide?

If death by suicide occurs within the policy’s suicide exclusion period (typically first 2 years).

What is absolute assignment of a policy?

Transfer of full ownership rights to another party (e.g., a charity).

What is collateral assignment?

Using a policy’s cash value as security for a loan from a third-party lender.

Give an example of a reduction provision in a policy.

A benefit that decreases as the insured reaches specified ages.

What is a living-benefit (accelerated death benefit) provision?

Allows part of the death benefit to be paid in advance if the insured is terminally ill.

Why might a policy loan trigger taxable income?

If the loan exceeds certain tax limits relative to the policy’s adjusted cost basis.

Who is the plan sponsor of a group insurance contract?

The employer, union, or association that contracts with the insurer.

What is an Administrative-Services-Only (ASO) group plan?

The employer self-funds benefits but hires an insurer to administer and adjudicate claims.

What is required before group-plan eligibility is accepted?

The covered group must be clearly defined (e.g., all members of a specific union).

Describe long-term-care (LTC) insurance.

Pays periodic benefits when an insured cannot perform specified activities of daily living.

What minimum guarantee must segregated funds provide?

At least a 75% maturity and death-benefit guarantee (often 100% for some contracts).

Which CLHIA guideline covers segregated-fund disclosure standards?

Guideline G2.

Who is the claimant in a life-insurance death claim?

The party entitled to receive proceeds (beneficiary or estate).

What documentation must accompany most death claims?

Proof of death and proof of claimant’s entitlement.

How soon must insurers pay once satisfactory proof of claim is received?

Within 30 days (interest is often added for delays).

Who receives accidental dismemberment benefits when a beneficiary is named?

The life insured/policyowner (not the beneficiary), because the insured is still alive.

What is required to support most critical-illness claims?

Diagnosis by a relevant medical specialist licensed in Canada.

What happens to a critical-illness policy after the lump-sum benefit is paid?

Coverage ceases; no further claims are payable.

What does 'commuted value' mean in pension transfers?

The present lump-sum value of a defined-benefit pension, transferable under specific rules.

Who must receive a pension survivor benefit if the member dies before retirement?

A spouse (or common-law partner) has first entitlement, even over a named beneficiary.

What principle requires agents to match products to the client’s objectives and circumstances?

Suitability (implemented through needs-based selling and KYC).

A policyholder passes away within the two-year contestable period. The insurer then discovers the deceased had materially misrepresented their health history on the original application. What legal action can the insurer take concerning the death benefit?

During the contestable period of a life policy, an insurer discovers a material misrepresentation made by the insured, who then dies. What is the potential outcome regarding the death benefit?