The mind does not question naturally; most of the times it is on autopilot; assuming and then inferring
When Manulife introduced the new segregated fund named the Income Plus, it did a major change to the contract provision in relation to the way the income guarantee were affected by withdrawals. This change was a departure from a history of 20 years where segregated funds guarantee were reduced on a proportional basis. This was not true for the Income Plus anymore. If you took $1 dollar than the maximum allowed, the guarantee was reset to current market value of the fund. In my region, this change was never showed or presented. It was probably not on purpose and probably Manulife assumed that we would all read the marketing materials where the change was shown and explained. And for most of us, we did read the material, but no one caught the change. Why? I will discuss the reasons which are linked at how our minds work at the end of this text and what it means from a legal point of view and what should be done to increase consumer protection.
But let’s get back on topic. As stated under the Uniform Insurance Act, for all provinces, a life policy contract must include certain mandatory provisions such as entire contract clause, grace period, reinstatement, suicide clause…
The ownership clause is not included in the list of mandatory provisions and as a result, this clause can greatly vary between insurers. In our example, we will use 2 insurers. RBC has the following clause:
Transferring Ownership of this Policy
You can transfer Ownership of this Policy to another person or entity, subject to our approval and to legislation in effect at that time. This is known as an absolute assignment. If you have named an irrevocable Beneficiary, you will need his or her written consent to transfer Ownership of this Policy. We are not bound by an assignment until we receive written notice of it at our office, and we are not responsible for its effect or validity. You may name a new Owner at any time while this policy is in force by filing a written request with us. Once it is approved and recorded at our office, the change will be effective on that date whether or not you or the Life Insured are alive when we record the change.
While this policy is in effect, you can exercise your rights as owner of the policy, subject to the provisions of this policy and as limited by law. For example, in the case of an irrevocable beneficiary designation or a collateral assignment, you might need the beneficiary’s or assignee’s consent.
You can make a collateral or an absolute assignment of this policy. Any assignment should be filed with us. An assignment does not bind us until we receive written notice of it at our Head Office. We are not responsible for the validity of an assignment. Only the entire policy can be assigned and not individual coverages. Any assignment of the policy will constitute an assignment of the Side Account
As we can see there is a major difference between RBC and Manulife. With RBC, the change of ownership must be approved. With Manulife it is only conditional on a written notice.
For any consumers, these differences are extremely important. It is exactly like renting versus owning. With RBC, the consumer does not fully own the policy. He is basically renting it. With Manulife, the consumer has full ownership. Who wants to rent insurance for the same price when you can own it? Now, the consumer does not know that there can be difference in the ownership clause of life insurance contracts. This knowledge resides or should reside with the advisor. As a result, if you are an advisor, do you know the wording of this clause for the policies of the insurers that you are selling? If you don’t you are not meeting your duty to your clients.
The Entire Contract Clause
The entire contract clause states that the policy and the application for insurance that is attached makes up the entire contract. This is important to protect the consumer, because the company cannot rely on any other documents to make up the contract. Now in the RBC assignment clause provision, it states that it must approve the request. Is this a simple administrative approval to ensure that all the signed paperwork is signed? Or is it an approval based on conditions where RBC can literally refuse to make the change as demanded of the policyowner? In my opinion, such refusal would constitute a violation of the Entire Contract Clause by referring to legal provisions outside the contract to determine if the change of ownership is valid or not. I believe that if for example, RBC requires that an insurable interest exists to do a change of ownership, such restriction would have to be stated in the contract and not outside the contract. This is my opinion.
The way the mind works…
As we have seen with the Manulife example, Manulife employees and advisors did not notice a major change to a policy provision by reading the marketing material. Why? We perceive only parts and pieces of the world around us, but our minds fill in the blanks to create the illusion of a seamless experience. Our perception of the world is like a puzzle where there are pieces missing. Despites the holes in the puzzle our minds can still see the picture. Our minds assumed and then it will infer. This increases with the more knowledge and experience you have. For example, Manulife proportional clause for the decrease in the guarantee caused by a withdrawal had been the standard for many years. For an agent of 20 years experience, his mind will assume that this standard cannot change and therefore if the advisor is not cautions, even if reads the material, his mind will see what he has assumed and not what has been written and therefore he will not notice the change. If he had been new to Manulife, his mind would not have been influenced by the idea of a standard, and he would seen the new provision.
What does this mean? It means that for advisor and consumers, standard provisions are important. If they are mandatory, the advisor does not need to check the contract because the provision cannot change unless the law is changed. Aside from mandatory provisions in the law, FSCA would like to see benchmark standard provisions. An insurer would not be obligated to use this benchmark in the contract but, the insurer would be required to disclose that its provision is different than the benchmark. This would both protect the advisor and consumers