The act of terminating a policy with an insurance company and replacing it with a new insurance policy. An internal replacement involves both policies from the same company while and external replacement involves two separate policies, each from a different insurance company. Replacement transactions are highly regulated for the benefit of consumer protection.
MORE (Replacement) "Replacement Insurance guarantees that the insurer will pay for the cost of replacing the home in its current condition up to the policy’s limits. This is a less expensive form of homeowner’s insurance than Guaranteed Cost Replacement Insurance (which will pay to put your home in its current condition and meet all current codes as well) and it typically won’t pay to bring your home up to current standards."
Replacement became a huge problem (and a source of embarrassment) in the insurance industry in the 1970s and '80s when interest rates were high.
Several relatively new and aggressive life insurance companies produced payout projections beating anything the traditional stalwarts were offering. But it was all a paper mirage. Many of the companies were taken over by their state insurance commissions because they were insolvent, leaving the policyholders without insurance or a payout.
Partly out of a reaction to this debacle and to make the insurance industry more professional, most life insurance applications now include a question asking if this new policy is replacing an old one. If so, the agent must provide a detailed explanation. Additionally, most states now require life insurance agents to file "notifications of replacement" with their state insurance commissions and to comply with various regulations.
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