The inappropriate replacement of insurance contracts is a practice that has created serious industry problems.  Although the replacement of existing life insurance may certainly be appropriate, it often is not.  However, irrespective of its suitability, the agent must make certain that the comparison of the proposed policy with the existing policy is complete and accurate.  

 A complete comparison with respect to a life insurance policy replacement requires that the consequences of any replacement be made clear to the policyowner.  For example, it must be explained that:

the suicide and incontestable provisions begin anew
the previous policy's cost basis may be lost, and
adverse tax consequences could result .

Furthermore, if a replacement form is required by the state in which the transaction is taking place, the agent must provide it.  

Legislation has recently been adopted in certain states concerning life insurance replacement requirements that is expected to be endorsed by the National Association of Insurance Commissioners (NAIC) as model legislation for other states.  The legislation is a significant departure from existing replacement regulations that have been on the books for many years.  Pursuant to this new insurance replacement legislation the following steps must be taken for every life insurance policy replaced:

Insurers must have internal procedures in place to handle replacements and a company officer responsible for monitoring and enforcing them.

Applicants are given a 60-day period following the replacement sale during which they can change their mind and have their initial premium returned.  It is during this 60-day cooling-off period that replacing companies must implement additional disclosure requirements.

Agents are required to obtain a list of all of the applicant's existing life insurance and annuity contracts and must provide the applicant with a form that defines the scope of a life insurance replacement.  The form must be signed by both the agent and the applicant.

If replacement occurs or is likely to occur, the replacing agent must complete a statement disclosing specified information about the new policy and submit it with the life insurance application.  An insurer whose agent is replacing existing life insurance must reject any application received that isn't accompanied by the necessary disclosure forms.

·     Replacing insurers have increased disclosure responsibilities that they are expected to implement during the 60-day period, including -  
supplying the replaced company with copies of the sales materials and proposals used in the new sale, and
sending the disclosure statement to the insurer whose coverage is being replaced to complete the information concerning the policy being replaced.

The insurer whose life insurance is being replaced must forward the disclosure statement with both the new and existing policy information to its agent of record and to the new agent for delivery to the policyowner.

The applicant is given the completed disclosure statement containing the comparative data concerning the existing and replacement policies which should enable him or her to make an informed decision concerning the replacement.

A failure by a replacing agent to make a full and fair disclosure of all of the relevant information is a practice known as twisting.  It is illegal and unethical and, if the steps of this legislation are followed, it will be virtually impossible.  


Florida's current replacement rule requires agents to ask prospects if an existing policy's coverage is reduced as part of the application process.  If the agent knows -- or should have known -- that such reduction in an existing policy's value occurs when soliciting new coverage, the agent must complete a replacement form (Form DI4-312).  The applicant may request a comparison of the existing policy's benefits to the proposed coverage -- the replacing insurer must provide a comparison, if requested.  

As mentioned earlier, twisting is the practice of replacement based on misrepresentations.  Churning is the practice of an insurer replacing existing coverage with a new policy based on misrepresentations.  Both practices are illegal in Florida.