Replacement occurs when new life insurance is purchased and existing coverage is lapsed, surrendered, converted, or reduced. Strict regulations protect consumers from unsuitable replacements.
Definition:
New life insurance purchased and existing policy is: - Lapsed: Allowed to terminate - Surrendered: Cashed in - Converted: Changed to different type - Reduced: Coverage decreased - Used as collateral: For loan for new policy - Reissued: With reduction in cash value
Timeframe: Within 60 months (5 years) of new policy
Triggers: - Replacing life insurance with life insurance - Replacing life insurance with annuity - Replacing annuity with life insurance - Internal replacement (same company) - External replacement (different company)
Does NOT apply: - Adding coverage (no reduction of existing) - Group insurance conversions - Credit life insurance - Employer-paid group life
Existing insurer's right to retain business:
Efforts to keep policy in force: - Explain existing policy benefits - Offer policy modifications - Adjust premiums or coverage - Agent contact with policyowner - Compare new vs. existing coverage
Example:
Policyowner considering replacement
Existing insurer notified
Conservation actions:
- Agent explains current policy advantages
- Reviews cash value accumulation
- Offers reduced premium through paid-up additions
- Shows policy has better features than proposed
Result: Policyowner keeps existing policy
Insurer's right: - May contact policyowner - May send conservation materials - May offer incentives to keep policy - Cannot harass or mislead
When provided: At or before application
Who provides: Replacing agent
Content: - Explains replacement - Lists advantages and disadvantages - Warns about potential issues - Describes free look period - States existing insurer will be notified
Must be signed by: - Applicant - Agent
Side-by-side comparison:
Compares: - Premiums (existing vs. new) - Cash values (current and projected) - Death benefits - Policy loans outstanding - Surrender charges - Riders and benefits - Costs over time
Example comparison:
Existing Proposed
Annual Premium: $1,200 $1,500
Death Benefit: $250,000 $500,000
Cash Value (now): $25,000 $0
Cash Value (20yr): $65,000 $75,000
Surrender Charge: $0 $5,000
Replacing company must notify: - Within 5 business days - Name of existing insurer - Policy being replaced - Policyowner information
Allows existing insurer to: - Contact policyowner - Begin conservation efforts - Provide additional information
Agent must:
If replacement involved, follow procedures
Provide notice at or before application:
Get signature
Complete comparison:
Provide copy to applicant
Document reasons:
In client's best interest
Notify existing insurer:
Replacement must be suitable:
Consider: - Client's age and health - New underwriting (may not qualify) - New contestable period - New suicide exclusion period - Surrender charges on existing - Loss of benefits in existing policy - Cost comparison - Tax implications
Unsuitable replacement examples:
Age 75, replacing 20-year-old policy:
- Loses incontestable protection
- New 2-year contestable period
- Higher premiums at older age
- May not qualify medically
Replacing whole life with term:
- Loses cash value
- Term expires at age 80
- No coverage in later years
Misrepresenting to induce replacement:
Examples: - Exaggerating defects of existing policy - Concealing disadvantages of new policy - Making false comparisons - Incomplete disclosure of costs
Illegal and grounds for: - License revocation - Criminal charges - Civil liability
Replacing for agent's benefit, not client's:
Characteristics: - Frequent replacements - Primary benefit to agent (commissions) - Little/no benefit to client - Internal replacements for commission
Example:
Agent replaces client's policies every 2-3 years
Each time:
- Agent earns new first-year commission
- Client pays new surrender charges
- Client restarts contestable period
- No material benefit to client
Result: Churning - illegal
Existing insurer misleading to prevent replacement:
Examples: - Exaggerating benefits of keeping policy - Misrepresenting new policy features - Threatening loss of benefits - Delaying processing of surrender
Also illegal
Extended protection:
Typical requirements: - 30 days (vs. 10 days for new policies) - Full refund of premiums - No questions asked - Extra time to reconsider
Important: - Do NOT cancel existing policy until new policy free look expires - Keep old policy in force during free look - If return new policy, still have old coverage
Required documentation:
Agent must maintain: - Notice Regarding Replacement (signed) - Comparative information - Reasons for recommendation - All replacement forms
Retention period: - Minimum 5 years - From date of sale
Insurer must maintain: - All replacement documentation - Agent certifications - Notifications sent/received - 5 years minimum
Same company:
Still replacement if: - Existing policy reduced, lapsed, or surrendered - Cash value reduced - Policy reissued with less benefit
Requirements: - Same disclosure rules apply - Must be suitable - May have special rules - Commission limits may apply
Example:
Client has whole life with Company A
Agent proposes new universal life with Company A
Surrenders whole life to fund new UL
Result: Internal replacement
Requires: Full replacement disclosure and procedures
Tax-free exchanges:
Allowed exchanges: - Life insurance → Life insurance - Life insurance → Annuity - Annuity → Annuity - NOT: Annuity → Life insurance (taxable)
Requirements: - Direct transfer (not constructive receipt) - Same insured/annuitant - Same owner - Full replacement disclosure still required
Tax benefit: - No taxable gain on exchange - Basis carries over to new policy - Defers taxation
Replacement occurs when new life insurance is purchased and existing coverage is lapsed, surrendered, converted, or reduced. Strict regulations protect consumers from unsuitable replacements.
Definition:
New life insurance purchased and existing policy is: - Lapsed: Allowed to terminate - Surrendered: Cashed in - Converted: Changed to different type - Reduced: Coverage decreased - Used as collateral: For loan for new policy - Reissued: With reduction in cash value
Timeframe: Within 60 months (5 years) of new policy
Triggers: - Replacing life insurance with life insurance - Replacing life insurance with annuity - Replacing annuity with life insurance - Internal replacement (same company) - External replacement (different company)
Does NOT apply: - Adding coverage (no reduction of existing) - Group insurance conversions - Credit life insurance - Employer-paid group life
Existing insurer's right to retain business:
Efforts to keep policy in force: - Explain existing policy benefits - Offer policy modifications - Adjust premiums or coverage - Agent contact with policyowner - Compare new vs. existing coverage
Example:
Policyowner considering replacement
Existing insurer notified
Conservation actions:
- Agent explains current policy advantages
- Reviews cash value accumulation
- Offers reduced premium through paid-up additions
- Shows policy has better features than proposed
Result: Policyowner keeps existing policy
Insurer's right: - May contact policyowner - May send conservation materials - May offer incentives to keep policy - Cannot harass or mislead
When provided: At or before application
Who provides: Replacing agent
Content: - Explains replacement - Lists advantages and disadvantages - Warns about potential issues - Describes free look period - States existing insurer will be notified
Must be signed by: - Applicant - Agent
Side-by-side comparison:
Compares: - Premiums (existing vs. new) - Cash values (current and projected) - Death benefits - Policy loans outstanding - Surrender charges - Riders and benefits - Costs over time
Example comparison:
Existing Proposed
Annual Premium: $1,200 $1,500
Death Benefit: $250,000 $500,000
Cash Value (now): $25,000 $0
Cash Value (20yr): $65,000 $75,000
Surrender Charge: $0 $5,000
Replacing company must notify: - Within 5 business days - Name of existing insurer - Policy being replaced - Policyowner information
Allows existing insurer to: - Contact policyowner - Begin conservation efforts - Provide additional information
Agent must:
If replacement involved, follow procedures
Provide notice at or before application:
Get signature
Complete comparison:
Provide copy to applicant
Document reasons:
In client's best interest
Notify existing insurer:
Replacement must be suitable:
Consider: - Client's age and health - New underwriting (may not qualify) - New contestable period - New suicide exclusion period - Surrender charges on existing - Loss of benefits in existing policy - Cost comparison - Tax implications
Unsuitable replacement examples:
Age 75, replacing 20-year-old policy:
- Loses incontestable protection
- New 2-year contestable period
- Higher premiums at older age
- May not qualify medically
Replacing whole life with term:
- Loses cash value
- Term expires at age 80
- No coverage in later years
Misrepresenting to induce replacement:
Examples: - Exaggerating defects of existing policy - Concealing disadvantages of new policy - Making false comparisons - Incomplete disclosure of costs
Illegal and grounds for: - License revocation - Criminal charges - Civil liability
Replacing for agent's benefit, not client's:
Characteristics: - Frequent replacements - Primary benefit to agent (commissions) - Little/no benefit to client - Internal replacements for commission
Example:
Agent replaces client's policies every 2-3 years
Each time:
- Agent earns new first-year commission
- Client pays new surrender charges
- Client restarts contestable period
- No material benefit to client
Result: Churning - illegal
Existing insurer misleading to prevent replacement:
Examples: - Exaggerating benefits of keeping policy - Misrepresenting new policy features - Threatening loss of benefits - Delaying processing of surrender
Also illegal
Extended protection:
Typical requirements: - 30 days (vs. 10 days for new policies) - Full refund of premiums - No questions asked - Extra time to reconsider
Important: - Do NOT cancel existing policy until new policy free look expires - Keep old policy in force during free look - If return new policy, still have old coverage
Required documentation:
Agent must maintain: - Notice Regarding Replacement (signed) - Comparative information - Reasons for recommendation - All replacement forms
Retention period: - Minimum 5 years - From date of sale
Insurer must maintain: - All replacement documentation - Agent certifications - Notifications sent/received - 5 years minimum
Same company:
Still replacement if: - Existing policy reduced, lapsed, or surrendered - Cash value reduced - Policy reissued with less benefit
Requirements: - Same disclosure rules apply - Must be suitable - May have special rules - Commission limits may apply
Example:
Client has whole life with Company A
Agent proposes new universal life with Company A
Surrenders whole life to fund new UL
Result: Internal replacement
Requires: Full replacement disclosure and procedures
Tax-free exchanges:
Allowed exchanges: - Life insurance → Life insurance - Life insurance → Annuity - Annuity → Annuity - NOT: Annuity → Life insurance (taxable)
Requirements: - Direct transfer (not constructive receipt) - Same insured/annuitant - Same owner - Full replacement disclosure still required
Tax benefit: - No taxable gain on exchange - Basis carries over to new policy - Defers taxation