2.3 Tennessee Replacement Rules

What Counts as a Replacement

A replacement is any transaction in which a new life policy or annuity is purchased and, as part of it, an existing in-force policy is:

• Lapsed, forfeited, surrendered, or terminated
• Reduced in value, benefits, or term
• Borrowed against (a loan or partial surrender to fund new premiums)
• Converted to reduced paid-up or extended-term, or otherwise amended to reduce benefits
• Reissued with a reduction in cash value

The key word is funding: if money or value moves out of the old contract to support the new one, the replacement rules trigger. Trap: simply applying for additional coverage that stands alongside the existing policy is not a replacement — there must be a reduction or termination of the existing contract.

Producer and Insurer Duties

Tennessee follows the NAIC replacement model. The duties divide between the producer and the two insurers:

The applicant must also receive notice of the right to a policy summary or ledger from the existing insurer.

Costs and Protections That Must Be Disclosed

The replacement notice forces a side-by-side comparison so the consumer sees what is at stake:

Prohibited Practices

Twisting

Twisting is using misrepresentation or incomplete comparison to induce a policyholder to replace coverage — for example, falsely telling the owner the old policy is "worthless," overstating the new policy's values, or hiding surrender charges. Twisting is an unfair trade practice under Title 56 and can lead to fines, license suspension, or revocation.

Churning

Churning is replacing policies (often using the same insurer's existing cash values) primarily to generate new commissions rather than to benefit the client. A pattern of repeated replacements across a producer's book is the red flag examiners look for.

Distinguishing the Two

Memory hook: Twisting involves a lie (misrepresentation, often between different companies); churning is a pattern of unnecessary replacements (often within the same company). Both are illegal regardless of whether the consumer is technically harmed.

Worked Scenario

A producer tells a client their 15-year-old whole-life policy "has stopped earning anything" — which is false — and gets them to surrender it, incurring a $1,400 surrender charge, to buy a new policy with a fresh 2-year contestability and suicide period and higher attained-age premiums. Analysis: the misstatement to induce replacement is twisting; the producer also failed to deliver an accurate replacement notice. The client lost their seasoned contestability protection and paid an avoidable surrender charge. This is exactly the fact pattern the replacement rules exist to stop.

Step-by-Step Replacement Procedure

Knowing the sequence is worth several exam points. A compliant replacement runs:

1. Ask the question — the application asks whether existing coverage will be replaced; the producer must ask directly.
2. Deliver the notice — if yes, present and read the Notice Regarding Replacement and obtain the applicant's signature.
3. Leave a copy with the applicant and submit a signed copy with the application to the replacing insurer.
4. Notify the existing insurer — the replacing insurer sends notice so the existing carrier can attempt conservation within its window.
5. Maintain records of every replacement for the period the TDCI requires.

Skipping any step is a market-conduct violation even if the consumer ends up better off.

When Replacement Rules Do NOT Apply

Not every new sale is a regulated replacement. The rules generally do not apply to:

Conservation and the Consumer's Choice

During the existing insurer's window it may send a conservation letter highlighting what the policyholder would forfeit — guaranteed rates, riders, seasoned contestability, and accumulated cash value. The consumer is free to replace anyway; conservation is informational, not a veto. Trap: an answer choice that says the existing insurer can "block" or "refuse" the replacement is wrong — the carrier may only attempt to conserve, and the owner makes the final decision after full disclosure. The whole framework is built so the consumer chooses with eyes open, never to prevent legitimate replacements.