What does the term "replacement" refer to in life insurance?

The term "replacement" in life insurance specifically refers to the practice of replacing an existing life insurance policy with a new one. This can occur for a variety of reasons, such as obtaining better coverage, lower premiums, or different policy features that better suit the policyholder's current needs. When a policyholder decides to replace their insurance, it is crucial for them to understand the implications, including any lapses in coverage, the financial implications, and how it might affect their overall insurance plan.

The process typically involves evaluating the existing policy, understanding why the replacement is necessary, and ensuring that the policyholder is not being placed in a worse position than they were in with their previous coverage. This is why the defined concept of replacement includes the consideration of both the old and the new policy and the reasons for the switch. Proper handling of replacements is also important to comply with regulations designed to protect consumers from unnecessary changes that may not be in their best interest.