When a client is replacing an existing life insurance policy (surrendering, lapsing, or reducing coverage on an existing policy and replacing it with a new one), specific disclosure obligations apply beyond the ordinary pre-sale requirements:
- A replacement form must be completed and signed by the client, disclosing that a replacement is being effected
- The agent must explain, in writing, the costs of replacement: surrender charges on the existing policy, any loss of accumulated cash value, the effect of the client's older age on new premiums, and the existence of a new contestability period on the new policy
- The agent must confirm that the replacement is in the client's best interest
This requirement exists because replacement is a high-risk transaction for clients and a high-incentive transaction for agents. Provincial regulators treat replacement without adequate disclosure as a disciplinable offence, separate from any finding of churning or twisting.
Common mistake: believing that the replacement form is a technicality and completing it after the fact. The form and explanation must precede the client's decision to proceed.
Recall: Name three specific disclosures an agent must make before a client replaces an existing life insurance policy.