North Carolina Life Insurance Practice Exam

The replacement rule is designed to protect consumers from losing benefits or incurring losses when they replace an existing life insurance policy with a new one. If an agent is aware that an applicant intends to use funds from an old policy to purchase new insurance, the replacement rule applies to ensure that the agent fulfills specific requirements, such as providing necessary disclosures regarding the implications of replacing the policy. This includes information about the potential loss of benefits, waiting periods, or any changes in coverage.

The replacement rule mandates that the agent assess whether the new policy serves the applicant's interests compared to the existing one. It emphasizes the importance of transparency and informed choices, enabling consumers to make better decisions about their insurance coverage. This rule is particularly relevant in situations where the applicant may not fully understand the consequences of surrendering an old policy, including any tax implications or loss of accumulated cash value.