Understanding Life Insurance Replacement: Guidelines for a Smooth Transaction

Any transaction in which a new life policy or annuity is to be purchased, and the producer knows, or should know, that existing contract(s) will be: lapsed, forfeited, surrendered, terminated, reduced in value, amended with a reduction in benefit or term, have a reduced cash value, or is subjected to borrowing, is best known as a __________.A. ConversionB. ReplacementC. ReissuanceD. Re-entry

Replacement

The correct answer is B. Replacement.

Explanation: Replacement refers to a situation in which an existing life insurance policy or annuity is terminated, and a new policy is purchased in its place. This usually occurs when the policyholder decides to exchange an existing policy for a new one due to reasons like a change in financial needs or to take advantage of better policy features.

The replacement process involves the purchase of new life insurance or an annuity and the surrender of the old policy or contract. The producer (insurance agent) involved in the transaction should ensure that the replacement is suitable for the client’s financial needs and that the client is not disadvantaged by the replacement.

If the producer knows, or should know, that the existing policy is going to be lapsed, forfeited, surrendered, or reduced in value, and still recommends replacement, it is known as a “twisting” transaction, which is prohibited and can lead to regulatory action against the producer.

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