Replacement is the act of purchasing a new life insurance or annuity contract that will cause an existing policy or contract to be lapsed, surrendered, forfeited, converted, reissued with a reduction in value, or otherwise negatively affected. Because replacements can involve loss of guarantees, surrender charges, new contestability and suicide periods, or diminished cash values, regulators require careful documentation and comparison. Most states have specific replacement regulations that prescribe forms and disclosures to ensure that clients understand potential advantages and disadvantages before proceeding. Sound replacement decisions consider costs, benefits, health changes, company strength, and long-term client objectives-not just short-term premium savings.

In everyday practice, advisors encounter replacement when reviewing old policies, responding to external offers, or proposing new strategies like 1035 exchanges. Carriers and agencies require completion of replacement forms that disclose existing coverage, reasons for change, and acknowledgment of potential downsides. Compliance teams scrutinize replacement activity to guard against churning and unsuitable switches. Advisors who follow best practices conduct side-by-side comparisons of guarantees, charges, and projected values, then document why the new contract better serves the client's goals. Clear communication about replacement helps clients avoid giving up valuable benefits unnecessarily and reinforces a fiduciary or best-interest mindset in product recommendations.