A replacement occurs:
- Where the purchase of an individual life insurance contract is likely to result in termination, cancellation or reduction in benefits of another insurance contract. A reduction of benefits may include:
- the use of significant cash values of an existing policy for the ongoing funding of a new policy;
- changed to paid-up insurance or continued as extended term insurance or under automatic premium loan;
- the loss of certain tax benefits;
- converting a term insurance to a permanent insurance. A term conversion is a contractual right where a term insurance (policy or benefit) is being converted to a permanent insurance. In circumstances where a client's protection would be reduced, this would be considered a replacement.
- Example: A client has a term insurance (policy or benefit/rider) with a face amount of $500,000 and wishes to convert to a permanent insurance of $300,000, and keep the remaining $200,000 term in force - it is not a replacement. However, if the $200,000 term were to be cancelled, it would be a replacement.
Quebec specific
In Quebec, an individual life insurance contract includes health insurance (long term care insurance, critical illness insurance, Personal health insurance and disability insurance.) In addition to #1 (above) a replacement in Quebec also occurs:
- Where a client's adhesion to a group insurance contract is likely to result in the termination, cancellation or reduction of benefits of an individual insurance policy.
- In certain situations where a person has coverage without an actual policy having been issued such as:
- a signed insurance proposal for which:
- the mode premium has been paid in full, by cheque;
- the signatory of the proposal has given either a bank authorization or a written authorization to transfer funds from one policy issued by an insurer to another policy issued by the same insurer;
- a signed insurance proposal providing for temporary coverage of not more than one year, for which the temporary insurance premium has been paid.
- a signed insurance proposal for which:
Where an insurer is prepared to issue a contract in accordance with the terms and conditions of the insurance proposal, but subject to payment of an additional premium, the representative must follow the replacement procedure before he obtains a similar contract without any additional or extra premium from another insurer.