Replacements

Policyholder 1 -"I'm dropping my whole life policy with your
company and replacing it with company x's universal life
policy."

Agent 1 --"Universal life is not right for you, and I recommend
retaining your present policy."


Policyholder 2--"I'm dropping my whole life policy with your
company and replacing it with company x's universal life policy."

Agent 2--"Universal life is not right for you, and I recommend
retaining your present policy." (Sounds familiar, so far!)
"But if universal life is what you really want, I will sell you
our company's product."

-- HAROLDLEFF

1983Universal Life, Society of Actuaries

  • 1035
  • Churning
  • Twisting
  • Another recent marketplace phenomenon has been a sharp increase in replacement activity, with indications that perhaps half of all lapses involve replacement situations.
  • The revised NAIC Life Insurance Replacement Model Regulation adopted in 1978 is based on a recognition that a replacement is not necessarily disadvantageous to a policyholder, i.e., some replacements are well-justified and definitely in the consumer's interest.
  • One can see the obvious conflict between a company trying to maintain good persistency, which would mean combating at! replacement activity, and trying to promote the policyholder's best interest, which sometimes would mean not resisting a replacement.
  • The higher the volume of replacements, the more serious would be the company's dilemma.

1982-2, NAIC Proceedings - (524-526) - STATEMENT ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURANCE TO THE NAIC (A) COMMITTEE'S MANIPULATION, LAPSATION, D1VlDEND PRACTICES AND ANNUITY DISCLOSURE TASK FORCE - June 8, 1982

4. Another recent marketplace phenomenon has been a sharp increase in replacement activity, with indications that perhaps half of all lapses involve replacement situations.

  • The revised NAIC Life Insurance Replacement Model Regulation adopted in 1978 is based on a recognition that a replacement is not necessarily disadvantageous to a policyholder, i.e., some replacements are well-justified and definitely in the consumer's interest.

    -- ACLI Letter

1982-2,  NAIC Proceedings 

 

  • Historically, companies were reluctant to replace life insurance because they might be in violation of the "twisting" laws.
  • Times have changed.
  • In 1969, the National Association of Insurance commissioners developed the 1970 Model Life Insurance Replacement Regulation. This removed most of the "twisting" fears. 

--  WILLIAM T. TOZER <ACLI>

1981 - INDIVIDUAL LIFE INSURANCE COST DISCLOSURE ISSUES, Society of Actuaries

Senator METZENBAUM:

Mr. Hunt, you made a statement that concerns me greatly. You
said in the 1980's, replacement life insurance policies began to proliferate.

Insurance companies are encouraging their policyholders
to cash in their life insurance to buy new and often less secure
products with the proceeds.

Why are so many policyholders cashing in their life insurance
and buying new products?

1992 - GOV - Consumer Disclosure of Insurance - 323p 

Replacement
Replacement falls under a broader category of disintermediation.

  • That is, the decline of the life insurance industry as a savings medium.
  • Disintermediation occurs through lapsation, increasing policy loan utilization, the continuing shift towards term insurance as well as a wave of product replacements within the industry itself.
  • It also occurs with a substantial opportunity cost as new savings dollars are being invested in other media.

--  William Britton Jr., Vice President and Principal of the Tillinghast firm

1983 - INDIVIDUAL LIFE INSURANCE, Society of Actuaries

In a June 13, 1978 letter to the NAIC, the ACLI opposed the 20-day "cooling-off" period option on the following ground:

Once a replacement sale has been consummated and the existing policy, insurer or agent have been discredited in the eyes of the policyholder, a reversal of that action will be extremely difficult, even if replacement is shown to be disadvantageous to the policyholder.125

1979 - GOV - FTC STUDY OF LIFE INSURANCE COST DISCLOSURE - Cannon - 592p