Replacing an Older Whole Life Policy in Tennessee
A Tennessee-licensed life producer meets with Margaret, age 67, who has held a $150,000 whole life policy for 18 years. Its cash value is $42,000, and she has an $8,000 policy loan. Margaret has mild COPD and takes daily medication. The producer recommends replacing it with a $250,000 universal life policy costing $480 per month. The new contract has a 10% first-year surrender charge and restarts the contestability and suicide periods. The producer proposes a 1035 exchange of the $34,000 net cash value. Margaret says she mainly wants to preserve a death benefit for her adult children and avoid risk. The producer has not yet provided a replacement notice.
1. What Tennessee replacement and disclosure obligations must the producer satisfy before Margaret signs the application?
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Tennessee's replacement regulation treats this as a replacement because Margaret will lapse or surrender an existing life policy to buy a new one. Before she signs, the producer must:
- Present and read the required Notice Regarding Replacement and give her a copy.
- Obtain her signature on the notice and on the application.
- List the existing policy and the new policy, including the $150,000 death benefit and $42,000 cash value.
- Submit the replacement notice with the application so the insurer can notify the existing insurer within the required time.
- Provide a policy summary and disclose the new surrender charge, contestability, and suicide periods. The producer cannot rely on a generic brochure; the notice must be specific to this transaction. Failure to follow the replacement rules is an unfair trade practice and can support a complaint even if the new policy is otherwise valid.
2. Evaluate the suitability of the proposed replacement. Include the 1035 exchange, loan, contestability, and surrender charge consequences, and identify at least one alternative.
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Suitability is doubtful. Margaret is 67 with COPD, wants to preserve a death benefit, and says she wants to avoid risk. Replacing an 18-year-old whole life policy means:
- The new $250,000 universal life policy restarts the two-year contestability and suicide periods. If she dies in the first two years, the insurer can investigate or deny for material misrepresentation.
- The 10% first-year surrender charge applies to a policy she may need to access; at her age, liquidity matters.
- The $8,000 loan must be resolved. A 1035 exchange of the $34,000 net cash value is generally tax-deferred for life-to-life, but an unpaid loan can be treated as boot or reduce the exchanged value.
- The new premium ($480 per month) may not be sustainable; universal life is not guaranteed. Better alternatives include keeping the existing policy and repaying the loan, or buying additional term or a smaller guaranteed policy. If replacement is still considered, document why it meets her needs.
3. If Margaret delivers the policy and changes her mind, what cancellation rights and refund should she expect, and how does that interact with the replacement?
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After delivery, Tennessee's free-look law gives Margaret at least 10 days to cancel the new life policy for a full refund of premium. Because this is a replacement, the new insurer should also have procedures to reverse the transaction and reinstate the old policy if she cancels within the free look. The producer should not pressure her to sign a waiver. If she cancels, any 1035 exchange should be unwound; the $8,000 loan and $34,000 net cash value need to be restored to the old policy. If the old policy was already surrendered and cannot be reinstated, that is a serious suitability problem and may require a complaint or remediation.