It is no accident that this chapter concerning ethical issues begins with the subject of professionalism.  While acting in a professional manner involves more than attention to ethics, it is difficult to imagine that a person who does not take ethical issues seriously could ever become a genuine professional.  Consider briefly some of the attributes that characterize professionalism in the life and health insurance business.


It may seem almost too obvious to mention, but an agent must have appropriate insurance knowledge to act professionally. The knowledge you acquire to start selling insurance is just the beginning of a lifetime of self-development to stay abreast of new products and evolving issues in the insurance business. Expanding knowledge is essential for professionals who help people manage the financial decisions that profoundly affect their future well being.

Along with increasing knowledge, you must develop the skills to use what you learn in a way that benefits both you and your clients. For example: it is not enough simply to know the features of every product you can sell. You must also know for whom each product is most appropriate, how a product does or does not meet the financial objectives of a particular client, because to sell an unsuitable product can be a greater travesty than not selling any product at all if the results are detrimental to the client.


Insurance agents often seek educational opportunities that lead to one or more professional designations conferred by recognized educators in financial service fields.

Chartered Life Underwriter (CLU)

One such well-known designation is that of Chartered Life Underwriter (CLU) awarded by the American College in Bryn Mawr, Pennsylvania. To reach the CLU designation, agents undertake in-­depth study over a period of time of a wide range of topics directly related to the insurance industry. Each topic is followed by an examination and when all exams are successfully completed, along with specified experience requirements, the designation is awarded.

Chartered Financial Consultant (ChFC)

The American College also has a program of study that leads to the Chartered Financial Consultant (ChFC) designation. Similar to the CLU designation in course and experience requirements, the ChFC focuses less on life insurance company operations and more on the myriad of financial planning considerations such as investments, retirement and estate plans. Successful exam results coupled with the appropriate experience lead to the designation.


Certified Financial Planner (CFP)

Agents interested in financial planning have another option, the Certified Financial Planner

 (CFP) designation offered by the College of Financial Planning in Denver. The requirements are similar to the American College designation, along with the necessity for successfully completing the stipulated exams and having the required experience.


Professionalism also means being client-focused, or putting the client's needs first.  Unquestionably, one reason you have chosen the insurance business for your career is that you want to pursue opportunities that will reward you financially in relation to your achievements.  That's fine; obviously, you must think of your own financial needs.  What we mean here by putting the client's needs first involves the decisions you make when (not if!) you're faced with the temptation to go for the bigger commissioned item when the smaller commissioned item fits your client's needs just a little bit better.

Don't be fooled into thinking that the temptation to sell policies under less than optimum conditions will never present itself.  You are almost certainly going to be faced with tough choices sooner or later and the thought will probably cross your mind that you really can justify promoting the product that will give you the better commission. This is not at all an insulting statement; rather it is an acknowledgment that we are all human beings subject to tough decisions that can become tougher when our own financial security is a consideration.  Being aware that you will, sometime, be placed in such a position can help you recognize the situation when it occurs, deal with it, and resolve it by focusing on the client.  Interestingly, agents generally find those putting clients' needs ahead of their own results in greater rewards and more business for themselves.


 As a life insurance agent, you become a representative of the entire insurance industry. In their own minds, people do business with other people, not with companies. In effect, you become 'the insurance industry to many people because they will judge the insurance business by their relationship with you.  To your clients, since you represent the insurance company, your professionalism reflects how people view the insurance business.

Because you represent the insurance business, it is also important to respect your competitors and convey that respect to clients when they broach the subject of the competition.  Never be disparaging about others in the insurance business, even if you believe it is warranted. Instead, illustrate how you your product and your companies can meet the client's needs.  This parallels the idea of staying client-focused. You don't need to disparage the competition in order to defend your products and practices if you can honestly and objectively show clients what you can do for them.


Insurance is essentially a service business.  Yes, you sell a product, but think about the nature of the product, especially in comparison to other consumer products, a car, for example.  When a consumer buys a car, instant gratification results.  The consumer drives the car off the lot, can touch it, smell it and show it to other people has instant use of it and will continue to use it at his or her convenience.  The benefits are tangible, obvious and immediate. Now consider an insurance policy.  Yes, the buyer has it in his or her possession, can touch it, smell it, and talk about its benefits, but, quite frankly, from a consumer point of view, so what?  The primary benefit is generally not immediate (most people hope-especially for life insurance) and there is nothing tangible to show for the money spent. For life insurance, the tangible benefit-whether it is used for the cash value or payment of a benefit is available only in the future.  As a result, the most important current benefit of an insurance policy is the service an agent provides.

Insurance buyers sometimes complain that, while they receive a great deal of attention from insurance agents who are trying to make a sale, they feel essentially abandoned after the sale is made. This is an unfortunate signal that agents have forgotten about service. Here are some important services an insurance agent should always perform:

Follow up with the client before the second premium is due. Because clients who allow a policy to lapse often do so by not paying the second premium, it is important to provide service early to reduce the chances of termination.  Call clients to answer any questions they might have about the policy or about how to pay the next premium, showing your interest before the premium is due.

Review client needs on a regular basis. Don't let more than a year go by without contacting your existing clients about reviewing their current needs. People's lives change. They get married and divorced. They have children. Their income increases. Business needs change, too. Owners and employees alike come and go. Business income and values increase and decrease. Life changes can generate needs for new or different products. If you don't take the initiative, clients think you don't care about them. Aside from serving the client's needs, remember that if you don't look after your clients someone else might earn the business that could have been yours.

Assistance to beneficiaries. When an insured dies is almost inevitable for life agents. Helping people through the claims process or answering questions and generally being available are services they will appreciate and remember. You will have the personal satisfaction of knowing you have helped people during one of the most difficult experiences of their lives.

Assist claimants in filing insurance claims. No matter how thoroughly you have explained how the insurance works, insured’s often forget or become confused when they actually need to file a claim. You can help by answering questions, talking a claimant through the process over the telephone or even visiting in person to help organize bills and fill out the claim forms. If claimants don't understand which costs are covered, you can review the coverage and show them how to use the policy and claim forms for future claims. If necessary, you can help claimants reach the right person in the claims department to discuss a claim. As you can see, a claim can offer numerous opportunities for you to provide small services that have high value for your clients.

These services as well as the other factors included in this section about professionalism all have a common objective, serving the client well, and that is at the heart of ethical behavior.



Insurance involves a high degree of public trust. One part of that trust has to do with the fiduciary responsibilities of insurance companies and their agents. T he term “fiduciary” refers to the holding of something of value for another, which is what the insurer does on behalf of insured’s. This term and its related responsibilities also apply to agents since they advise the public about financial matters, suggest solutions that cause members of the public to spend money, and collect money from clients when they purchase insurance.  This fiduciary position requires agents to be very careful and completely ethical in insurance transactions.  You must satisfy yourself that you have asked for and received accurate information about the prospective insured's financial situation before you recommend any product.  When recommending a certain benefit amount for any type of insurance policy, be able to show the applicant what factors you considered.

Clearly and honestly explain details, such as how cash values accumulate, what they mean, what is guaranteed and what is not.  Be able to explain the tax effects of such things as policy ownership, dividends, and early withdrawal of cash values, death benefit installment payments and similar items.  Describe accurately and completely any special policy features.

When you receive premium payments from clients, you must not use that money for anything else, even temporarily.  Premium payments must not be placed in a bank account belonging to the agent, the agent's business or any other person or entity unless authorized by the agent's insurance company.  Some insurers may authorize agents to place premiums in their own accounts, retaining commissions and sending the balance to the insurance company.  This practice allows agents to both receive their own commissions and pay commissions to their hired agents promptly.


The insurance business operates largely on the basis of sales by agents who have been given authority by the insurer to act on the insurance company's behalf in securing clients. This concept of agency authority, sometimes called the powers of agency, again emphasizes the high levels of trust and ethics necessary in the insurance business.  The authority or power an insurer grants to its agents is legally spelled out in the contractual agreement between the insurance company and agents. Under common law, the insurance company is responsible for its agents' actions under the authority the insurer grants to the agent.  The legal waters become somewhat muddied, however, by the concepts of actual, implied and apparent authority.


Actual authority refers to the authority or power that is really and clearly given to the agent by virtue of the agency contract.  It is sometimes referred to as express authority because it is expressly stated in the contract.  For example, the contract might grant authority to represent the insurer in the states of Oregon and Washington, to submit insurance applications on the company's form, to collect and submit premium payments, and similar actions.



 Often, a contractual arrangement that gives actual authority carries with it some additional implied authority, therefore, implied powers are a subcategory of sorts of the express powers.  For example, if the contract gives the agent authority to collect premiums and forward them to the insurance company without further qualification, it is implied that the agent may collect premiums in any form, cash, personal check, money order or any other negotiable form. The insurer could not then reject a personal check as payment of a first premium on the basis that a certified check was required.  On the other hand, agents must be careful not to assume any authority is implied other than that included in the agency contract.  Agents can unwittingly bind the insurer to commitments it did not intend to make and at the same time deceive the applicant or insured, knowingly or unwittingly, but illegally in either event.


As opposed to actual authority, which occurs because of a contractual agreement between the principal (the insurance company in this case) and the agent, apparent authority involves the perspective of a third party.  Simplistically stated, apparent authority is any power ascribed to the agent because it appears to a reasonable third party that the agent does have that authority from the insurance company.  Like implied power, apparent authority can be binding upon the principal, the insurance company, if the third person had no reason to think the agent did not have the apparent power to act on the insurer's behalf.

In all cases involving the insurance agent's authority, agents and insurers should have a clearly defined set of limitations under which agents can obligate insurers.  It is also important for agents to act in such a way that there is no ambiguity that will confuse third parties such as applicants, insured’s or policy owners.


Like all businesses, the insurance industry is subject to laws designed to protect consumers from unethical or illegal practices.  Insurers, their employees and agents must abide by the general consumer protection statutes that apply to all businesses as well as any consumer laws specifically directed toward the insurance business.  Most consumer protection laws include a list of deceptive or otherwise illegal practices that specify, without being all inclusive, certain forbidden actions.  Insurers and other businesses are expected to follow not only the letter of these laws, but also the spirit. In this section, we will discuss regulations that apply directly to the business of insurance.

Unfair Trade Practices

Most states have adopted regulations recommended by the National Association of Insurance Commissioners (NAIC) regarding unfairtrade practices in the insurance business.  NAIC developed a model law to help states comply with a portion of the federal McCarran Ferguson Act, which gives states primacy over the federal government in regulating insurance matters.  The practices listed below are included in NAIC's model.



In the context of Insurance, unfair discrimination refers to:

  1. Refusing to issue or renew, or canceling or declining a policy because of someone's (1) sex-or sexual preference in a few states: (2) marital status: (3) handicapped condition.
  2. Limiting the availability of benefits or modifying benefits, rates, terms, conditions or types of coverage based upon any of the three items mentioned previously, unless any restrictions or modifications are based upon strict actuarial principles.


In most states, it is illegal for insurance agents to be involved in rebating, which is offering or giving something of value, other than the insurance policy itself, to an individual as an inducement to buy insurance.  A rebate could take many different forms, from a return of part of the premium to splitting the agent's commission to receiving cash or a valuable gift. It is also illegal for the insurance buyer to accept a rebate.


In some cases, a policy owner can benefit from replacing one insurance policy with another, but in many cases the policy owner stands to lose a great deal by replacement. An agent, who convinces a consumer to drop one policy in order to buy another, without clearly explaining any disadvantages and/or by misrepresenting facts to the policy owner's detriment, is guilty of illegal policy replacement.

Policy replacement is illegal when an agent uses deception in order to gain the sale for his or her own benefit without regard for the policy owner.  Some potentially negative consequences for life insurance policy owners are the loss of significant cash values, the inability to get the same amount or type of coverage for the same premium rate, payment of new sales commissions and administrative fees, and reinstatement of the contestable and suicide exclusion periods.

Agents must be extremely diligent in making appropriate policy comparisons in order to ensure that purchasing a new policy benefits the insured and that the replacement is legal.  In some states, policy comparisons must be made in writing, signed by the applicant as an acknowledgment of having received the written information, and copies must be left with the applicant.  Additionally, agents may be required to notify both the new insurer and the insurer of the older policy that replacement is being considered.


Agents who are guilty of illegally replacing a policy often do so by engaging in misrepresentation and fraud and these practices are also forbidden under any other circumstances.  Misrepresentation and fraud go hand-in-hand since agent misrepresentations are assumed to occur for the purpose of defrauding the applicant or insured (and in some cases the insurer).  Specifically, agents may not misrepresent facts to consumers about the policy being offered or about the financial condition of the insurance company that issues the policy.  Misrepresentation can occur orally or in writing, including any type of general advertising, or during personal contacts.

Misrepresentation can also occur by virtue of an agent's failure to tell consumers something they should know in regard to the life insurance sale or the policy.  By omitting such information that should have been disclosed, whether intentionally or unintentionally, agents may find themselves liable for subsequent damage to the insured.  For example: suppose an agent tells a client that he may skip premiums for a universal life insurance policy, but does not tell the client that doing so when there is little cash value can ultimately result in lapsing the policy.  Then, when the insurance company notifies the client that his policy is about to lapse, the client does not have the cash to pay the premium and, therefore, loses the policy. T he client can claim that the agent is legally liable for his loss of the policy because the agent failed to disclose the potential for insufficient cash values to cover premium costs.  This is an example of misrepresentation by omission for which agents maybe held liable.


Another form of misrepresentation could occur in the defamation of competitors by an agent. Because you are a representative of the insurance business, you should avoid showing disrespect for your competition. In addition, you must avoid going beyond disrespect to participate in this illegal act. Defamation is making false or malicious statements for the purpose of harming another's reputation. This is an issue in consumer's rights because defamatory comments might be made in the context of convincing someone to buy one company's policy rather than the policy sold by another insurer or agent.


Acts or agreements that use boycott, coercion or intimidation for the purpose of creating a monopoly or unreasonable restraints in the insurance business are also unfair trade practices. These three actions cover a great many possible illegal practices that could be directed toward the consumer or toward other insurers or agents.


Each state insurance commissioner is responsible for monitoring insurer advertising practices. In general, insurance advertising must be truthful and it must neither deceive nor mislead the average consumer. Most states follow the National Association for Insurance Commissioner's advertising standards, which include very specific practices to be followed or avoided.


The discussion about agents' fiduciary responsibilities indicated that misuse of funds, such as premiums, is illegal. In fact, one of the unfair trade practices involves failing to remit premiums to insurers or to refund premiums to applicants or to deliver claim monies. Agents have a limited amount of time during which they must forward funds to the proper places or face losing their licenses. Remember, monies intended for premiums or any use aside from the agent's own legal use may not be commingled with the agent's own funds unless the insurer authorizes the agent to retain commissions from premium payments and send the balance to the insurer.

Another unfair trade practice addresses unfair claim practices, forbidden when a claim is made against a policy. These are discussed in the following section.


Although technically part of unfair trade practices statutes, unfair claim practices are presented separately because they are specifically related to what occurs after a policy is in force, when an insured files a claim. For life insurance policies, this is a once-in-a lifetime act.

Again, the National Association of Insurance Commissioners has produced a model that is used in whole or in part by all states. A few states have modified the exact language and/or dropped or added specific items. Following is a paraphrased summary of prohibitions frequently found in states' unfair claim practices laws, which apply to all types of insurance transactions.

1.      Misrepresenting pertinent facts or provisions about the particular coverage.

2.      Falling to acknowledge and act promptly after receiving communications about a claim.

3.      Falling to adopt and implement reasonable standards for promptly investigating claims.

4.      Refusing to pay claims without conducting a reasonable investigation.

5.      Falling to affirm or deny coverage within a reasonable time after receiving proof of loss   statements.

6.      When liability has become reasonably clear, not attempting to settle claims promptly,  fairly and equitably.

7.      Attempting to settle claims for less than a reasonable person would have expected by reference to written or printed advertising that accompanied or was made part of an application.

8.      Making claim payments without including a statement that sets forth the coverage under which payments are being made.

9.      Attempting to compel claimants to accept settlements or compromises less than an amount awarded in arbitration by describing an insurer policy of appealing arbitration awards in favor of insureds or claimants.

10.   Delaying investigations or claim payments by requiring an insured, claimant or physician   to submit a preliminary claim report and a subsequent formal proof of loss form, both of which contain substantially the same information.

11.   Failing to promptly settle claims where liability is reasonably clear under one portion of a policy in order to influence settlements under other coverage’s in the policy.

12.  Failing to promptly provide a reasonable explanation of the factual or legal basis in the insurance policy for denying the claim or for offering a compromise settlement.

13.  Attempting to settle claims based upon an application for insurance that was altered without knowledge or consent of the insured.

14.   Failing to adopt and implement reasonable standards for processing and paying claims once the obligation to pay has been established.

15.  Failing to expeditiously honor drafts given to settle claims.

Because states have discretion to use any or all of NAIC's model and may adapt the wording and add or delete items, it is important for you to learn exactly what is included in the unfair claim practice statutes where you do business.


Delivering a new insurance policy gives agents the opportunity to reinforce the purchaser's good decision in buying the policy and to review the policy's features. This is a very important time because if an individual is going to drop an insurance policy, he or she usually does so very early in the life of the policy. In addition, in the rare cases where the first premium was not paid with the application, it is the agent's responsibility to collect the premium along with a statement from the insured person that he or she is still insurable.


Insurers usually must provide a policy summary along with the policy itself. Agents may use the summary to highlight certain features of the policy and point out how the insured may contact the agent or company, and then review other important features they might wish to emphasize. A policy summary is likely to be a single sheet providing basic information such as:

  1. The insured's name.
  2. The policy owner's name, when different from the insured.
  3. The name of the type of insurance purchased (as opposed to a special name the particular insurer has assigned to the policy).
  4. The names of any types of riders attached to the policy.
  5. The policy form number, which is the legal designation under which the policy was filed with the state insurance department.
  6. The policy number (account number) the insurer assigns to the individual insured and his or her particular policy.
  7. The effective date of the policy and any riders.
  8. The total annual premium and usually other modal premiums.
  9. The life insurance policy loan interest rate.
  10. Any benefit options selected by the insured or other owner of the policy.

Taking time to review the policy summary and the policy itself helps cement the developing relationship with a new client, while explaining features of the policy that are of particular interest to the client. For example, agents should explain items that affect the client on an ongoing basis, such as how the grace period works, any nonforfeiture provisions, how dividends are paid when applicable, how to file a claim for benefits, and similar information. This is also an opportunity to practice and demonstrate the professional knowledge and skills that are so important in the insurance business.


People such as insurance agents, physicians or attorneys who offer professional services to the public are expected to perform at a level somewhat above common standards. For example, if you give poor advice to a friend about what to do for a toothache, but you are not a dentist, you are held to a lower standard than if a dentist gave bad advice. The same is true of a nonprofessional giving advice about financial matters, such as insurance. On the other hand, the public holds professionals responsible for performing at a much higher level of expertise and if those professionals make mistakes, as all humans do occasionally, they are held legally liable for those mistakes.


Insurance agents can protect themselves against the possibility of being found legally liable for costly mistakes with Errors and Omissions (E&O) insurance. E&O insurance for agents is similar to malpractice insurance or professional liability insurance for doctors and lawyers. Obviously, it's preferable to avoid the mistakes that might lead to a lawsuit, but again, errors occur and the cost of E&O insurance is small compared to the potential cost of a liability lawsuit settled out of your pocket.

Most mistakes can be avoided if you know and follow the law; communicate with your clients informing and listening; and stay up to date with changes in the insurance business and legal environment. Earlier in this chapter, we mentioned how an agent may become legally liable for loss to a client by omitting information that should have been given to a client. Agents have most often had liability problems because they failed to do one of three things: (1) Match the coverage with the client's needs; (2) Suggest and acquire adequate insurance; (3) Maintain the client's coverage by allowing a policy to lapse without the client knowing it.

While E&O insurance does not protect an agent who willfully, knowingly or fraudulently causes harm to an insured, the coverage is invaluable for handling the legal consequences of inadvertent mistakes.

A Final Word

We hope you have seen the "thread" of ethics woven throughout this chapter as we discussed the professional characteristics of agents as well as rules and regulations that guide the life insurance business.

An important point about ethics is that, while ethical behaviors can be taught and unethical behaviors can be punished, whether or not someone chooses to act ethically is, finally, a choice. And while penalties may apply for violating the letter of the law, in fact, it is the spirit of the law that most closely reflects ethical actions.

Similarly, it is the spirit with which an agent approaches the insurance business that inspires ethical integrity.


Chapter 9 Review Questions


1.  Professionalism means

     A.  financial security for the agent.

     B.  client’s needs first.

     C.  the bigger the commission the better the client’s needs are met.

     D.  promoting a product to produce commission.


2.  Insurance is a

     A.  tangible product business.

     B.  commodity business.

     C.  gamble.

     D.  service business.


3.  Responsibilities of insurance agents that involve making recommendations, selling financial    products, and holding money are called _______ responsibilities.

     A.  consumer

     B.  actual

     C.  E & O

     D.  fiduciary


4.  The type of authority that is granted in an agency contract is called

     A.  actual.

     B.  imposed.

     C.  implied.

     D.  apparent.





5.  The unfair trade practice of refusing to issue an insurance policy solely because of someone’s  marital status is known as

     A.  coercion.

     B.  intimidation.

     C.  unfair discrimination.

     D.  misrepresentation.


6.  Advertising for an insurance company is monitored by the

     A.  IRS.

     B.  federal government.

     C.  state insurance commissioner.

     D.  life underwriters.   


7.  Insurance agents can protect themselves against the possibility of being found legally liable     for mistakes through

     A.  product liability insurance.

     B.  malpractice insurance.

     C.  professionalism.

     D.  Errors and Omissions (E & O) insurance.


  1.  8.  All of the following are professional designation EXCEPT

     A.  CLU-Chartered Life Underwriter.

     B.  ChFC-Chartered Financial Consultant.

     C.  CFP-Certified Financial Planner.

     D.  COA-Commission Oriented Agent.


  1. 9.  The Agent receives authority from the _________to act on the insurance company’s behalf.
  2.      A.  department of insurance.
  3.      B.  insurer.
  4.      C.  client.
  5.      D.  NAIC.
  7. 10.  An agent who convinces a customer to drop one policy in order to buy another, without clearly explaining any disadvantages, is guilty of
  8. A.  illegal policy replacement.
  9. B.  rebating.
  10. C.  unfair discrimination.
  11. D.  defamation.



1B  2D  3D  4A  5C  6C  7D 8D 9B 10A