When must a producer deliver a notice regarding replacement of life insurance

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.

An agent must submit to the insurer with or as a part of each application:

1. A statement signed by the applicant as to whether or not such insurance will replace existing coverage.
2. A signed statement as to whether or not the agent knows replacement is or may be involved in the transaction.

Where replacement is or may be involved, the agent must:

• Present to the applicant, not later than at the time of taking the application, a "Notice to Applicant Regarding Replacement of Life Insurance". The Notice must be signed by the applicant and agent and left with the applicant.
• Leave with the applicant the original or a copy of all Sales Proposals used for presentation to the applicant.
• Submit to the replacing insurer with the application, a completed copy of the "Notice to Applicant Regarding Replacement of Life Insurance.

Surrender recommendations

Insurance agents, insurers, or persons performing insurance agent activities under an exemption from licensure who recommend the surrender of an annuity or life insurance policy containing a cash value and do not recommend that the proceeds from the surrender be used to fund or purchase another annuity or life insurance policy, before execution of the surrender must provide, on a form that satisfies DFS requirements, information relating to the annuity or policy to be surrendered. Such information must include, but is not limited to, the amount of any surrender charge, the loss of any minimum interest rate guarantees, the amount of any tax consequences resulting from the transaction, the amount of any forfeited death benefit, and the value of any other investment performance guarantees being forfeited as a result of the transaction. [Sec. 627.4553]

Improper policy replacement can be divided into two categories: (1) Twisting and (2) churning.