For many people, life insurance is not a one-time purchase. There are many reasons why they would replace their policy with a new one—to obtain more or less coverage, to lower the premium payment, or for a policy better suited to their needs. However, sometimes people are enticed into replacing their policies for reasons that are not in their best interests, which is why there are some very strict rules, laws, and regulations in place to protect them against such replacements.

Key Takeaways

  • There are limitations in place when it comes to replacing life insurance policies. These limitations are meant to protect the insured. 
  • Major issues with replacing a life policy include contestability, surrender fees, and churning. 
  • The National Association of Insurance Commissioners lays out model regulation for replacement policies, such as a specific set of questions to be asked on an insurance application and a system the insurer puts in place to monitor replacement activities.

The Problem With Replacements

Replacing a life insurance policy is not as simple as exchanging an auto insurance policy for another. There are several factors involved that can negatively affect a policyholder’s coverage and future costs. Although a replacement could improve coverage or lower the premium amount, life insurance contracts include certain restrictions that could put an unwary policyholder at greater risk. 


First, life insurance contracts typically include a contestability period, usually two years, during which, if the insured dies, the life insurer could contest the claim based on any misrepresentations made on the application. When a policyholder replaces a policy, that contestability period starts all over again, as does the suicide exclusion, which allows the insurer to deny a claim if the insured’s death is caused by suicide within the first two years.

Surrender Fees

For cash value policies, such as whole life, universal life or variable life, there are additional complexities that would make a replacement less desirable. For example, some policies include surrender fees, which are charged when the policy is surrendered or cash values are withdrawn within a certain period of time. 

The fee is charged on any amount of cash values surrendered above a certain amount, such as 10% of the account value. The fees start out high at the beginning of the surrender period and are reduced each year until they reach zero. A policyholder replacing a policy while it is still within the surrender period has to pay the fee to transfer the cash value from one policy to another.


There is also the issue of churning by life insurance agents, which is the practice of persuading a policyholder to replace a policy for the sake of earning a new commission. It is for all of these reasons that the insurance industry, through state insurance departments and the National Association of Insurance Commissioners (NAIC), have established procedures that must be followed by life insurers and their contracted agents and brokers.

Replacement Regulations and Procedures

While each state department of insurance is allowed to issue its own specific rules and procedures on replacements, they are required to follow the model regulation established by the NAIC. The model regulation establishes minimum requirements that must be included in each state’s replacement procedures that must be followed by the insurers and the producers involved in the replacement.

The triggering mechanism for replacement procedures is a couple of questions typically asked on the life insurance application, such as, “Do you currently have a life insurance policy?” and “Do you plan to replace your current policy with a new one?” A “yes” answer to both triggers a clearly defined process for handling the replacement: informing the policyholder of the implications of a replacement; submitting a notice of replacement statement signed by the policyholder and the agent to the replacing insurer, which is the company proposing to issue a new policy, and the existing insurer, which is the company whose policy is being replaced; and providing the policyholder with a hard copy of all sales materials used leading up to the transaction.

The insurer is required to demonstrate that the state’s replacement procedures are in place, including the training of producers and a system to monitor the replacement activities of all producers.

The model regulation also establishes penalties for violations, which could include revocation or suspension of a producer’s or a company’s insurance license and a monetary fine. Under certain circumstances, an insurer could be ordered to make restitution or restore the policy and cash values for the policyholder.

For those who've determined that replacing their policy is still the best move for their circumstances, it's important to take the time to find the best possible life insurance policy in order to make it worth the trouble.