What is 'replacement' in life insurance and what are the rules about it?

Replacement is the practice of surrendering, lapsing, reducing, or otherwise giving up an existing life insurance policy to purchase a new one. It is heavily regulated because replacement often disadvantages the consumer: new policies start a new contestability period and suicide exclusion, new sales charges and surrender charges apply, and the insured is older and may be in worse health. Replacement rules require: (1) a Notice Regarding Replacement form signed by both producer and applicant, disclosing the replacement; (2) notification to the existing insurer so it can attempt to retain the policy; (3) extended free-look periods on the new policy; (4) suitability documentation. Replacement is not inherently bad — sometimes a new policy is genuinely better — but the burden is on the producer to document that the replacement is in the client's interest.