What is the definition of "replacement" in life insurance?

Replacement in life insurance refers to the process whereby a policyholder acquires a new policy while simultaneously terminating or allowing an existing policy to lapse. This concept is important because it affects how agents and insurers must approach the sale of new policies to ensure that they do not inadvertently harm the policyholder’s financial standing or coverage. When a replacement occurs, it is crucial for agents to inform clients of the implications of this change, including potential loss of benefits, waiting periods for new policies, or the impact on premiums.

The decision to categorize acquiring a new policy and terminating an existing one as replacement emphasizes the need for consumers to thoroughly understand their current coverage and the terms of their new/existing policies before making the switch. This ensures that individuals maintain adequate protection and continue to meet their financial needs appropriately.