A Necessary Evil…Replacement Forms

There are many good reasons to replace your client’s life insurance coverage. They may have reached the end of their level premium period and costs are going up.  They may need more coverage or want permanent coverage instead of term.  They may want to try and lower their premium payments.  All great reasons to replace current coverage.  Unfortunately, sometimes people are enticed into replacing their policies for reasons that are not in their best interest.  Therefore, there are now very strict rules, laws, and regulations regarding replacement.

These rules were enacted to:

• Regulate the activities of insurers and agents with respect to replacement
• Protect the interest of the purchaser of life insurance by establishing a standard of conduct
• Ensure the purchaser receives information with which a decision in their best interest may be made
• Reduce the opportunity for misrepresentation and incomplete disclosure
• Establish penalties for failure to comply with the requirements

What are some of the negative effects of replacement? Let’s look at a client’s contestability period, usually the first two years of the policy.  If your insured dies, the insurance carrier can contest the claim based on misrepresentation.  If the policy is replaced, that contestability period restarts.

Replacement of permanent insurance can become a bit more complex when you start looking at surrender fees, causing the policy holder to lose some of their accumulation value with a transfer or exchange of the policy’s cash value.

There is also the issue of churning by life insurance agents, which is the practice of urging a policyholder to replace a policy for the sake of earning a new commission.

It is for these reasons and more that the NAIC (National Association of Insurance Commissioners) has established procedures that must be followed by life insurers and their contracted agents and brokers. While each state’s Department of Insurance can issue its own specific rules and procedures on replacement, all the states are required to follow the regulation established by the NAIC.

So why am I telling you this? As a Brokerage General Agency, we get a lot of push back from agents and advisors about the replacement form.  Here are some examples:

• My client’s level premium term is expiring. Why does my client have to fill out a replacement form? The answer is, your client’s level term does not expire. It becomes an annual renewable term to their age 90 or 95 with premium increasing every year on the policy anniversary. So even though the client’s level premium period has come to an end, the policy itself has not.
• Why do I have to fill out the replacement form even if my client is not replacing coverage? All insurance carriers require the replacement form to be completed whether the existing coverage is being replaced or not. You, BBA Life Brokerage, and the insurance company are required to follow the afore-mentioned replacement regulation. This is their way of making sure that happens.

I would have to agree that having to complete the replacement form along with all those other forms may be a hassle (talk to me about Drop Tickets, an easier way to apply for life insurance). It is, however, a necessary evil to cover your hiney!!