Two $500,000 life insurance illustrations sit on your desk. One costs $200 more per year with an A++ rating. The other is cheaper with an A- rating. Which one should your client buy? The answer requires cost indices, insurer ratings, and replacement analysis, the framework C.26 tests.
Resolving the opener. Both insurers clear the A- threshold, so the $200 premium gap is not a financial-strength question. The decision turns on the cost index for the client's holding intention. If the client plans to keep the policy until death, compare net payment cost indices and pick the lower one, even if its raw premium is $200 higher. If the client may surrender, compare surrender cost indices instead. Premium alone is the wrong tiebreaker.
Every recommendation starts with the financial strength of the company behind the policy. Four rating agencies evaluate insurers: AM Best, S&P, Moody's, and Fitch. AM Best is the only one focused exclusively on the insurance industry, the most commonly referenced on the exam.
Common mistakes
- Comparing the wrong index to the client's goal. Keep until death = net payment cost index. May surrender = surrender cost index. Choosing the lower absolute premium is a trap. Trap: "Policy B is better because $3,950 is less than $4,200", wrong when the relevant cost index favors Policy A.
- Confusing AM Best's rating scale. B+ means "Good" in AM Best's system, not mediocre. A- falls within "Excellent." The exam may present a client alarmed by an A- rating, the correct response is that A- meets the recommendation threshold.
- Selecting annuity-to-life as a valid 1035 exchange. The hierarchy is one-directional: life → life, life → annuity, annuity → annuity. Annuity → life is prohibited. A second error: believing 1035 eliminates the contestability period. It does not. Trap: "The 1035 exchange eliminates the contestability period on the new policy."
Bottom line
- Net payment cost index = keep until death; surrender cost index = may cancel. Lower is better for both.
- AM Best is the only insurance-specific rating agency; A- or above is the recommendation threshold.
- 1035 exchange hierarchy: life-to-life, life-to-annuity, annuity-to-annuity; annuity-to-life is prohibited.
- Replacement resets the 2-year contestability period and suicide exclusion; a 1035 does NOT fix this.
Exam shortcut
Identify the client's intention first: keep until death = net payment cost index; may surrender = surrender cost index. Never choose based on premium alone. For 1035 exchanges, remember the one-way hierarchy and that 1035 does NOT fix replacement risks. "Death = Net payment, Departure = Surrender": both D words match the correct index. "2-2-S-S": replacement resets, 2-year contestability, 2-year suicide exclusion, Surrender charges on old, Surrender charges on new.
The full lesson (about 2,967 words, 20 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C.26
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