Insurance · Laws and Regulations

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

Correct answer

Surrendering, lapsing, or modifying an existing policy to purchase a new one — heavily regulated because it often disadvantages the consumer; specific disclosure forms and waiting periods apply

  1. A Replacing a lost policy document
  2. B Surrendering, lapsing, or modifying an existing policy to purchase a new one — heavily regulated because it often disadvantages the consumer; specific disclosure forms and waiting periods apply
  3. C Switching agents
  4. D Changing the beneficiary

Why this is the answer

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.
Source: NAIC Model Outline, Replacement

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