Be Careful: Did You Inherit Legacy Contracts Without a Clear Set of Instructions?

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In today’s financial advisory environment, change is inevitable. Advisors frequently inherit legacy contracts they did not originate or sell. While these contracts can hold significant value, they often come with complexity, incomplete records, and a lack of institutional memory. Understanding and managing these contracts responsibly is critical to serving clients well.

Client and Advisor Demographics: Challenges of Time and Knowledge

Legacy contracts often belong to older clients who purchased policies decades ago under very different economic and regulatory conditions. The original intent behind these purchases may no longer align with current client goals. Successor advisors frequently lack product knowledge since many were not in the business when these contracts were sold.

Moreover, original company representatives and product specialists may have left the industry or firm. Industry consolidation and staff turnover mean institutional knowledge about older products can be lost, making contract management more challenging.

The Risks of Incomplete Knowledge

Taking on unfamiliar contracts carries several risks:

Regulatory and Compliance Risks: Providing advice without fully understanding contract terms can lead to unsuitable recommendations and fiduciary breaches.

Eroded Client Confidence: Clients expect their advisor to understand their holdings. Inability to answer questions can damage trust.

Missed Strategic Benefits: Legacy contracts often include riders, guarantees, or tax advantages no longer available, which can be overlooked without proper analysis.

Legacy Does Not Mean Outdated or Inferior

Older contracts frequently include valuable features that modern products lack: guaranteed interest rates, lifetime income guarantees, conversion options, and favorable tax treatments. These benefits can be integral to effective retirement planning, estate strategies, or business succession.

Examples of Legacy Contract Benefits

Guaranteed Interest and Income: Older annuities may offer higher guaranteed rates and income riders, outperforming today’s low-yield products.

Conversion Privileges: Some term life policies allow conversion to permanent insurance without underwriting—critical for clients with health changes.

Enhanced Riders: Long-term care, disability waivers, and enhanced death benefits embedded in older contracts may surpass what’s available today.

Tax Advantages: Certain contracts benefit from grandfathered tax rules that reduce client tax burdens.

Corporate-Owned Policies: Included in business valuations during ownership transfers, these policies often provide key person protection or facilitate buyouts under favorable terms.

Juvenile Policies Now Owned by Adults: Life insurance bought for children by parents or grandparents can now be valuable assets, often with locked-in low premiums and accumulated cash value.

Clear Communication and Shared Responsibility

Advisors should set clear expectations with clients managing legacy contracts:

Allow Time for Review: Any action on a legacy contract must be preceded by thorough review and due diligence.

Require Notification: Clients should inform advisors before making withdrawals, beneficiary changes, or other contract activity, as these may have financial or tax consequences.

Share Responsibility: Clients need to understand that older contracts may come with documentation limitations, and that full certainty is sometimes impossible.

Importantly, current owners may not have been involved in the original purchase—such as in juvenile policies or corporate insurance included in business ownership transfers—meaning the contract’s original purpose may have shifted.

Due Diligence Is Essential

Advisors must:

• Obtain and review all available contract documents, including historical statements and correspondence.

• Contact the current insurance carrier or administrator to clarify terms and available options.

• Recognize that industry consolidation may mean limited historical data; proceed on a best efforts basis with full disclosure.

• Utilize internal resources—compliance, product specialists, and archives—to interpret older contracts.

• Document all steps taken to demonstrate professional care and compliance.

• Evaluate Before Replacing: Legacy Can Offer Superior Value

Replacing legacy contracts with new products is not always beneficial. Consider:

Conversion Privileges: Like modern policies, most older term policies may allow conversion without new underwriting, which can be crucial if client health has declined.

Rider Benefits: Income or long-term care riders in legacy contracts often provide more generous coverage than newer versions.

Tax Treatment: Many legacy contracts enjoy favorable grandfathered tax status unavailable in current products.

A thorough comparison should always precede any recommendation to replace a contract.

Conclusion: Legacy Requires Leadership and Care

Legacy contracts are part of modern advisory reality. While managing them can be complex, they present unique opportunities for deeper client engagement and superior outcomes. An advisor’s role is to fully understand these contracts, communicate transparently, and act diligently to serve the client’s best interest.It is not about whether the advisor originally sold the contract—it is about stepping up to manage it responsibly and professionally.

Jeff Holtzman,

Vice President, Sales

QFS

jeff.holtzman@qfscanada.com