1.11.1 Policy Replacement
Florida's Replacement Rule sets forth the requirements and procedures to be followed by insurance companies and insurance producers when a proposal is being made to a client who plans to replace existing life insurance contract(s) with the proposed new life insurance policy.
Replacing an existing policy with another should be done for only one reason: The producer genuinely believes that canceling the policy (or reducing its values) to replace it with another policy is beneficial to the client and in the client's best interest. To replace a policy to reap the reward of a higher first-year commission is totally unethical.
It is seldom in the best interest of a policyholder to replace a life insurance policy with a new one due to the following issues.
- Most of the first year's premium is consumed by the commission.
- The premium is higher due to the insured's advanced age.
- Waiting periods begin anew.
Policy replacement is "...an action which eliminates the original policy or diminishes its benefits or values."
Examples of this are policy loans, taking reduced paid-up insurance, or withdrawing dividends. The replacement of existing life insurance policies with new contracts of life insurance requires a written comparison and summary statement at the request of the policyholder.
See page 414, Florida study manual, "What is required by the Florida Replacement Rule?"
Improper policy replacement can be divided into two categories: (1) Twisting and (2) churning.
