Policy Replacements

Overview

Agents should be cautious when replacing existing life policies and annuity contracts.  Agent must first clearly and fairly communicate to the client information needed to determine whether replacing an existing policy or contract may or may not be appropriate.  Also comply with any state replacement regulation and follow these important requirements:

  • Obtain, study and keep a copy of your state’s regulations.
  • Deliver any state or insurance company required Replacement Notice to the applicant at the time of application.
  • Comply with all other state regulations.
  • Accurately record the answers to the replacement questions on the policy application and the agent’s report.

Make certain that you document the reasons justifying the replacement.  Your documentation should include the client’s reasons for the replacement and the advantages and disadvantages to the client.  The Society of Financial Service Professionals (www.financialpro.org) provides a fact-finding replacement questionnaire you can use with clients.

General Guidelines

If a client is considering replacing an existing policy with another one, you can provide a valuable service by helping them evaluate whether a replacement is in their best interests.  You should discuss and review the following factors with the client to determine whether a replacement is appropriate:

Life Insurance

  • Surrender charges, if any on the existing policy.
  • Front-end loads or sales charges of the new policy.
  • Effect of the new contestable and suicide periods of a new policy.
  • Comparison of cash value under the old and new policies.
  • The costs and effect of borrowing from the existing policy, if contemplated.
  • Tax treatment of the surrender or exchange or any outstanding policy loans.
  • The advantage of modifying the existing policy, if possible, to meet client’s objectives rather than buying a new policy.
  • Evidence of insurability: the new policy may be rated or declined.
  • Cost and duration of premiums and fees for each policy.
  • Financial ratings assigned to the new company if significantly different than the ratings of the old company.
  • Accessibility of policy values of the new policy. Be certain to disclose the availability of policy loans, the duration of the surrender charge period, amount of penalty and charges Member with partial withdrawals and surrenders, and any limits or conditions for waiving those penalties or charges.

Annuities

  • Surrender charges on the existing annuity.
  • Cost and fees of each annuity.
  • Guaranteed death benefits or riders.
  • Liquidity of the new annuity. Be certain to disclose the duration of the surrender charge period, amount of penalty and charges Member with partial withdrawals and surrenders, and any limits or conditions for waiving those penalties or charges.
  • Tax treatment of the surrender or exchange.
  • Financial ratings assigned to the new company if significantly different than the ratings of the old company.

Long Term Care Insurance

  • Difference in the benefits and the limitations and exclusions between the policies.
  • How important is it to the client if the replacement results in the incontestability period are starting over under the new policy?
  • Financial ratings assigned to the new company if significantly different than the ratings of the old company
  • Underwriting class under the new policy is or is not as favorable as it was under the old policy
  • Possible tax consequences resulting from canceling the old policy and replacing it with the new one.

Other Points to Remember Regarding Replacements

Use fact-finding tools to assist you in a complete and accurate comparison of policies.  In the end, clients must make their own decisions regarding what they believe to be their best interests.  However, a quick review of these issues and tools will allow you to assist the client in making informed decisions concerning the advisability of replacement.  If the client decides to replace a policy, you should advise him or her to keep the old one in force until an underwriting decision is made on the new policy.  In addition, the appropriate replacement form for the state in which you’re writing business must be used.  One copy of this form is to be left with the applicant and one copy is to be returned to the insurance company with the completed new application.

In most states, completion of the replacement form will require you to certify that the replacing coverage materially improves the client’s position. Indiscriminately replacing a clients coverage may subject you to fines and other penalties.