Changing Existing Life Insurance to Another

During the 1980s, there was a term price war and every year companies offered lower priced products. Insurance agents would sell company A’s policy one year; the next year they’d come back to the same client offering Company B’s policy at better rates. Agents encouraged this churning because they received a new first year commission every time they sold a new policy. Since these first year commissions were higher than the renewal servicing commissions, many insurance agents simply replaced their own policies every two or three years.

As price competition increased, consumers quickly realized that replacing the old policy with a new cheaper one every two or three years, they could get a free medical examination and a new cheaper policy. However, some not-so-bright consumers ended up trading larger benefits for smaller ones or even worse paid-up cash value policies for term life insurance policies.

In the wake of all this, the insurance companies needed to do several things:

• keep the policyholder paying premiums for a longer period (5 to 10 years),
• keep the agents from replacing the policies every two years with cheaper products, and
• offer low attractive prices.

Clever actuaries found a solution in the arcane laws governing the amounts of money insurance companies have to reserve per $1,000 of insurance. The solution was to offer level term insurance for 5, 10, 15, or 20 years. At the end of the level period, the premium would increase like traditional annual renewable term.

This solved all of the problems:

• the customer was given incentivize to keep the policy for the full level period,
• the agent couldn’t easily persuade the customer to change policies, and
• the insurance company found a way to lock in the consumer for a 5, 10, or 15 year period.

Still, replacement remains a perilous process.

Technically, replacement means any transaction in which new life insurance or a new annuity is purchased. It is known or should be known to the agent or insurance company (if there is no agent) that, as part of the transaction, the existing life insurance or annuity will be:

• lapsed, forfeited, surrendered, or terminated;
• converted to reduced paid-up insurance continued as extended term insurance, or reduced in value by the use of non forfeiture benefits or other policy values;
• amended to produce a reduction in the benefits or in the term for which coverage would otherwise remain in force, or for which benefits would be paid; or
• reissued with reduction in cash value.

Commissions paid to agents for setting a new policy are particularly lucrative. For this reason, unscrupulous agents have persuaded consumers to give up old policies for new ones, even if it was not in their best interests.

Frequently, it is not in the best interest of the policy owner to replace existing life insurance with a new policy. The reasons for this are many:

• new insurance requires the applicant to prove insurability,
• premiums may be higher for a new policy, new policy provisions will have to be compiled with such as a new incontestable period, the existing policy’s provisions may be more liberal than a new policy’s provisions, and
• generally, a new policy will not have any current cash values.

Generally, if replacement is involved in any insurance sale or transaction, the agent or broker is required to: list all existing life insurance policies to be replaced; give the applicant a completed Comparison Statement, signed by the agent or broker, and a Notice to Applicants Regarding Replacement of Life Insurance (a copy of the forms should be left with the applicant); and give the insurer a copy of any proposals made, and a copy of the Comparison Statement with the name of insurer that is to be replaced.

At the same time, the duties of the replacing insurance company include: making sure that all replacement actions are in compliance with state regulations; notifying each insurer whose insurance is being replaced and upon request, furnishing a copy of any proposal and Comparison Statement; and maintaining copies of proposals, receipts and Comparison Statements.

The National Association of Insurance Commissioners (NAIC) has adopted a Model Life Insurance Replacement Regulation. The majority of states have replacement regulations based on this model.

You should check your state’s regulations to learn specific time limits, such as:

• the time within which an agent must supply the applicant with a Comparison Statement,
• the time and manner within which the agent must notify the insurer of replacement activities,
• the time within which the insurer must notify the insurer being replaced that such action is in operation, and
• the time within which the insurer being replaced must respond to the replacing insurer and the applicant.

Also, individual state law specifically outlines the method in which records are to be maintained and the length of time the records are to be made available. A common wording for laws on record keeping is: These records shall be maintained for at least three years or until the next examination of the company by the Insurance Department.