Texas Replacement Rules

Replacement occurs when a new life insurance policy or annuity is purchased with the intent to terminate or reduce an existing policy. Texas has specific regulations to protect consumers.

Definition of Replacement

A replacement occurs when a new policy is purchased and:

• An existing policy is lapsed, forfeited, or surrendered
• Policy values are reduced or borrowed against
• Coverage is converted to reduced paid-up
• Policy is amended to reduce benefits
• Policy is reissued with reduced values

Duties When Replacement Occurs

Producer Responsibilities

1. Determine if replacement - Ask about existing coverage
2. Provide written notice - Replacement Notice to applicant
3. Complete comparison - Existing vs. proposed policy
4. Obtain signatures - Acknowledgment of replacement
5. Submit to insurer - All replacement documentation

Replacing Insurer Responsibilities

Required Documentation

Replacement Notice

Must include:

• Statement that replacement is occurring
• Comparison of existing and new coverage
• Summary of key differences
• Potential disadvantages of replacement

Comparison Requirements

Conservation Period

The existing insurer has opportunity to conserve the business:

• Receives notification of pending replacement
• Can contact policyholder
• Can offer alternatives
• Cannot make false statements about replacing insurer

Prohibited Practices

Twisting

Twisting is making misrepresentations to induce replacement:

Examples:

• Falsely claiming existing policy is worthless
• Misrepresenting surrender values
• Hiding costs of replacement
• Exaggerating benefits of new policy

Churning

Churning is excessive replacement to generate commissions:

• Multiple replacements for same client
• Pattern across producer's book of business
• Ignoring client's best interests

Penalties

Exam Tip: Remember that twisting involves MISREPRESENTATION while churning involves EXCESSIVE replacement. Both are serious violations in Texas.