How FSRA plans to correct troubling Ontario life insurance practices

Recently, the Financial Services Regulatory Authority of Ontario (FSRA), uncovered some alarming practices in the Ontario life insurance industry – which could potentially have a direct impact on your financial well-being as a consumer. Let’s take a deeper look at all the findings, plus explore how you can best protect yourself in the complex world of insurance.

Troubling findings from the FSRA

In one report, Life Insurance Thematic Examinations: Tiered-Recruitment Model MGAs, the FSRA examined the responses of 130 life agents from three different managing general agencies (MGAs). These MGAs all operate under a tiered recruitment model, meaning that life agents in the system don’t just make money off their own sales – they’re also compensated for the sales of those they recruit.

A shocking 50% of life agents were found to have committed a combined total of 184 contraventions to the Insurance Act. And while the report highlights more specifics, here are some notable mentions of some troubling practices that were unveiled:

• 24% of life agents reported no sales from 2020 to 2021
• 79% of life agents reported part-time employment status
• 72% of life agents reported holding another form of employment 

A few other issues were identified, specifically ones that could lead to poor outcomes for consumers:

• Life agents may not have been properly trained or supervised
• Life agents failed to complete the required education to maintain their license
• Life agents did not properly disclose the insurance companies they represent
• Life agents did not properly disclose their plans for managing conflicts of interest

Concerns with universal life insurance sales

The report also found a surprisingly high number of universal life insurance policies sold, including the following breakdown:

• 56% of policies sold in 2020 were universal life insurance
• 57% of policies sold in 2021 were universal life insurance

Universal life insurance is a complex product, and it’s not suitable for everyone. That’s why the high number of sales is especially concerning – policyholders may be better off with simpler, more affordable alternatives, such as term life insurance.

Also read: Buying term life insurance and investing the difference

In a second report from the FSRA, Observed Practices in the Distribution and Sale of Universal Life Insurance, the regulatory body took a deeper look into 24 client files from life agents who operated under tiered-recruitment model MGAs. From this, the FSRA found that in 80% of instances, the universal life policies sold were not aligned with what the customer actually needed (or their circumstances). 

The report found that life agents were providing consumers with misaligned retirement planning advice. For instance, in one-third of the cases, overfunded policies were sold as a means for retirement funding or estate growth, but the majority of these clients (75%) also lacked a TFSA or RRSP account – two tax-efficient investment strategies that should highly be considered before a universal life insurance plan is purchased.

On top of that, misleading and unrealistic assumptions were being made during the sale of life insurance policies – agents did not properly go over the risks of market volatility with their clients, nor did they sufficiently highlight the performance of the selected investments. The FSRA also didn’t find documentation on lower-risk insurance coverage options or future savings strategies. 

How does this impact me as a consumer?

While these concerns aren’t representative of all life agents in Ontario, about 20% of agents in the province were working under a tiered-recruitment MGA at the time of the examination. The troubling practices can negatively impact you as a consumer in various ways – here are some examples:

Poor advice due to lack of knowledge – Tiered recruitment systems can provide life agents with an incentive to recruit as many other people as possible. If a new agent does not take their education and training seriously (or their job for that matter – as notably, the majority of agents reported holding other forms of employment), you may receive poor recommendations when it comes to purchasing your coverage. 

Non-disclosure of conflict of interest – If agents don’t properly disclose the life insurance companies they represent, it creates a risk that you won’t be presented with all the options available for your needs. It’s possible that a life agent could sell you a product that maximizes their own compensation, leaving you with a poor financial decision.  

Sale of unsuitable life insurance products – Purchasing a life insurance policy that isn’t actually right for you can come with huge financial repercussions. Universal life insurance is complex, and unlike term and whole life insurance, the premiums can change. If a market crash causes your investments to fall, and you don’t have enough out-of-pocket funds to cover the minimum premium, your policy could lapse, causing a whole lot of money to go to waste (plus, no more death benefit). 

Who actually needs universal life insurance?

Most Canadians purchase life insurance as a means to protect their loved ones, and this need is usually only temporary – your mortgage will eventually be paid off and your children will eventually leave the nest. That’s why term life insurance is often the best choice. It’s a much cheaper alternative than permanent options, like whole life insurance and universal life insurance. 

What sets universal life insurance apart is its ability to combine a death benefit (the lump sum payment that goes to your loved ones after you pass) with a cash value account of investments that you can access during your lifetime. And while whole life policies can also offer you this, universal life insurance is much more flexible – not only can you choose your own investment vehicle (e.g. stocks, bonds), but you can also choose how much you want to put in, provided the minimum payment in order to keep your policy active is covered.

At the same time, the complexity of the product means that it’s only suitable for certain individuals – this may apply to you if you check off the following boxes:

You have a need for permanent life insurance coverage – Permanent life insurance policies are guaranteed to pay out, provided you keep the policy active until your passing. These policies are typically used for estate planning, wealth transfers, and business-related needs, such as funding a buy-sell agreement between two co-owners of a company.

You have the funds to support potential premium increases – Depending on your plan, the premiums on a universal life insurance policy may increase as you age. And if your investments perform poorly, you may need to pay out more than you had originally budgeted. Universal life insurance is best suited for high-income individuals as lower-income earners may find it challenging to sustain the policy long-term. Notably, the FSRA found that in 70% of instances, the policyholder stated an annual income of $60,000 or less. 

You have maxed out other tax-advantaged accounts – While a universal life insurance policy may seem appealing due to its tax-deferred investment component, other accounts, such as a TFSA, RRSP, or RESP, can offer better advantages. The use of these other strategies should be maximized fully before you allocate funds toward investing through a life insurance policy. You also want to make sure that the funds you do put in won’t be needed in the short to medium term. 

You have the means to monitor the policy’s performance regularly – The performance of a universal life insurance policy needs to be monitored on an ongoing basis to ensure it doesn’t lapse. While cash value growth in your investment portfolio can allow you to skip some out-of-pocket premium payments, a loss can require you to pay out more. If you aren’t paying careful attention – and the minimum premium isn’t covered – you could lose the policy entirely. 

The FSRA’s plan to correct troubling practices

The FSRA has taken enforcement action against 65 of the 130 examined agents working under tiered-recruitment model MGAs. Additionally, a six-point plan has been put in place in an effort to correct the concerning practices within the industry:

1. Enhanced approach to sector supervision
2. A new regulatory framework
3. Industry guidance
4. Enforcement
5. Whistleblower protection
6. A consumer education campaign

As stated in their report, “By taking this action and addressing these problems head-on, FSRA believes it will improve the conduct practices of life insurance agents, MGAs, and insurers, and ensure people who contravene the Insurance Act face consequences. FSRA’s ultimate goal is enhanced protection and fair treatment for consumers.”

FSRA's Consumer Education Campaign

FSRA has just released more information about their campaign designed to protect vulnerable Canadians and their families who are seeking to purchase a life and health insurance policy. The focus of the campaign is to push Canadians to ask the right questions, educated them on what life insurance products are available, and ultimately empower them to make informed decisions.

The campaign will include information, such as:

How to ensure agents meet Ontario's requirements for legally selling life insurance.

• Does the agent hold an insurance agent licence to sell life insurance in Ontario?
• Has the agent disclosed to you in writing the names of providers of insurance products, services, and insurers that they represent?
• Has the agent disclosed to you in writing any conflicts of interest they may have?

What you need to know before agreeing to purchase any life insurance policy.

• Has the agent disclosed what life insurance is, how it works, and what is the best option for you and your family and why?
• Did the agent conduct a comprehensive insurance needs analysis?
• Did the agent describe all risks associated with all the products you are considering, including investment components and any associated ongoing costs or implications?
• Did the agent help you complete and submit your application, while answering any questions you may have?

These are just a few samples of the information and questions that FSRA wants Canadians to consider prior to committing to purchase any form of life or health insurance. No one should feel obligated to purchase an insurance product that they don't believe is right for them because after all life insurance is designed to protect individuals and their families. FSRA believes they have taken the first of many positive steps to help maintain the promise of life insurance.

How can I protect myself as a consumer?

As a consumer, there are a few steps you can take to ensure you’re protected from these troubling practices, including the following:

Educate yourself – Make sure you understand the ins and outs of your policy before signing on the dotted line – especially in cases of complex products, like universal life insurance.

Ask questions – Don’t hesitate to ask your insurance agent questions if you need clarification on anything, be it policy terms, premium payments, or even potential conflicts of interest that should be disclosed.

Review your coverage – If you have existing coverage, make sure it’s right for you. The last thing you want is to be paying high premiums on a product that doesn’t actually suit your needs, only to find out once you’ve invested too much money into it.

Shop the market – Take some time to compare life insurance quotes from multiple providers. It’s likely that the first offer you receive won’t be the best one out there, and by doing your due diligence ahead of time, you can set your expectations on the pricing straight. 

Find a trusted insurance representative – Choose an insurance representative that has a proven track record of helping their clients make informed decisions. At Ratehub.ca, we can connect you with a licensed life insurance broker who will guide you through the entire buying process with your best interests in mind.

Consider second opinions – If you have any concerns with your insurance representative, don’t be afraid to seek out another opinion. You may also want to seek advice from a financial advisor, especially if you’re looking to purchase life insurance as part of an investment strategy. 

Report issues – If you have suspicions of unethical practices, be sure to file a complaint with the FSRA. Not only can this protect you, but it can also help protect other life insurance policyholders within Ontario.

The bottom line

As a consumer, learning more about the ins and outs of the insurance industry can help you make better decisions when it comes to securing your financial future. So when it comes to purchasing coverage, make sure you’re aware of all the troubling practices you could run into.

Also read

• How does deferred life insurance work in Canada?
• Is whole life insurance a good investment?
• Is life insurance taxable in Canada?