United States
Hong KongTexas Annuity Replacement Practice Questions
Texas replacement questions compare the old contract's lost benefits, costs, liquidity, and guarantees with the new contract.
- Apply required disclosures and best-interest standards to the facts.
- A replacement is not automatically unsuitable, but tax treatment or a new illustration alone does not establish that it benefits the consumer.
On this page3 sections
A replacement is more than a direct surrender followed by a new annuity. TDI’s current LAC028 notice describes a replacement when, in connection with a new policy or contract purchase, the consumer stops premiums on an existing contract, surrenders, forfeits, assigns it to the replacing insurer, otherwise terminates it, or uses existing values to finance the new purchase. A recommendation must be evaluated for the consumer’s needs and the actual tradeoffs; a new bonus or illustration alone does not prove that replacement is beneficial.
The scenarios below are original practice questions, not recalled Pearson VUE items. Assume the agent is appropriately licensed and that the annuities are Texas-regulated unless a question gives different facts. Apply current TDI replacement forms and Texas Insurance Code Chapter 1115. When a detail depends on contract language—such as a surrender charge schedule, market value adjustment, rider guarantee, or tax basis—the stem states the necessary fact or the correct answer is to obtain it.
| Comparison item | Why it matters | Evidence to review |
|---|---|---|
| Current contract value and surrender value | The amount available to move may be less than account value | Latest statement, surrender quote, and charges |
| Guarantees and riders | Replacement may give up income, death, or living benefits | Rider terms, payout assumptions, and eligibility |
| New costs and restrictions | New surrender schedule and charges can reduce liquidity | Contract, prospectus if applicable, and disclosure |
| Consumer profile and objective | The proposed contract must address actual needs and time horizon | Age, assets, income, debts, liquidity, objectives |
| Prior replacement history | Recent exchanges can affect regulatory analysis | Applications and contracts for prior 60 months where relevant |
| Required notices | Consumer must understand replacement consequences | TDI LAC028, LAC029, insurer forms, signed records |
Practice questions
A consumer buys a new annuity and uses part of the cash surrender value from an existing annuity to pay the new premium. The old contract remains open with a reduced balance. How should the transaction be analyzed?
- A. It cannot be a replacement because the old contract was not fully surrendered.
- B. It may be a financed replacement because existing policy values were used to fund the new contract.
- C. It is automatically a tax-free gift.
- D. It is only a replacement if the new insurer is different.
An existing annuity has an account value of $100,000 and a current surrender charge of $7,000. The new contract’s illustration shows a higher first-year crediting rate. What should the agent compare before recommending the exchange?
- A. Only the first-year rate.
- B. The $93,000 available value, surrender charge, new contract costs and guarantees, liquidity, time horizon, and consumer objectives.
- C. Only the insurer’s financial rating.
- D. Whether the consumer can sign before the free-look period ends.
A retiree’s current annuity has a valuable guaranteed lifetime withdrawal rider. The proposed contract offers a bonus but no comparable rider. Which factor is most important to disclose and analyze?
- A. The rider is irrelevant if the new contract has a higher account value.
- B. The value and conditions of the guarantee the consumer would surrender, compared with the new contract’s benefits and costs.
- C. Only whether the agent receives a commission.
- D. The old insurer’s logo.
An agent recommends replacing an annuity only so the agent can receive a new commission, while the consumer loses features and receives no material benefit. What is the best answer?
- A. The recommendation is allowed if the consumer signs LAC028.
- B. TDI states it is against the law to recommend a replacement just so the agent can earn commissions.
- C. It is allowed if the new insurer has a higher rating.
- D. Any replacement is prohibited even if it materially benefits the consumer.
An agent suggests borrowing against an old annuity and using the proceeds to pay a new annuity premium. The old contract stays in force. What issue should be identified?
- A. The transaction cannot be a replacement because the old annuity remains active.
- B. A financed purchase using borrowed policy or contract values may be treated as a replacement and can reduce the old contract’s value or benefits.
- C. Borrowing automatically preserves every old guarantee.
- D. Only a direct cash surrender can create replacement risk.
The agent calls a proposed transfer a “1035 exchange” and tells the consumer there can be no tax or economic cost. Which response is most accurate?
- A. A tax-qualified exchange guarantees that no surrender charge or contract cost applies.
- B. Tax deferral under federal rules does not eliminate surrender charges, lost benefits, new fees, or the need to confirm tax eligibility.
- C. Every annuity replacement is automatically tax-free.
- D. A 1035 exchange is only available between two life insurance policies.
A consumer completed an annuity exchange 18 months ago and is considering another replacement. What is the best next step?
- A. Ignore the earlier transaction because it is already complete.
- B. Include the prior exchange in the review and check applicable Chapter 1115 replacement provisions and insurer requirements, including any relevant 60-month history.
- C. Automatically reject every second transaction for five years.
- D. Treat prior exchange history as relevant only to life insurance.
During an individual annuity replacement, which materials are most relevant to the consumer notice process?
- A. TDI LAC028 and LAC029 or other forms permitted by current Texas rules, plus required insurer records.
- B. Only a new illustration.
- C. FIN195, because all replacements mean the consumer refused information.
- D. A beneficiary change form.
The customer’s objective is to increase monthly income, and the existing annuity allows a payout option or rider adjustment. What should the agent consider?
- A. Recommend a replacement immediately because new applications are always better.
- B. Compare permitted changes to the existing contract with replacement costs and benefits before recommending a new contract.
- C. Ignore the old contract’s options because only the new contract matters.
- D. Tell the consumer to surrender without requesting a quote.
The consumer’s account statement is six months old and does not show current surrender charges or a market value adjustment. What should the agent do before computing the replacement value?
- A. Estimate the charge from another insurer’s schedule.
- B. Obtain a current in-force or surrender quote and contract terms from the existing insurer.
- C. Use the account value as cash available without qualification.
- D. Assume the MVA is always zero.
The agent compares the old and new interest rates but records nothing about the consumer’s age, income need, time horizon, liquid assets, or existing annuity benefits. Which conclusion is best?
- A. A rate comparison alone always satisfies the recommendation standard.
- B. The agent should gather and document an appropriate consumer profile and reasoned comparison; a rate-only analysis can omit material needs and costs.
- C. Only the insurer needs a profile after the contract is issued.
- D. The consumer’s signature replaces documentation.
Replacement review in a live case
- Identify whether the transaction meets the Texas replacement or financed-purchase definition.
- Obtain the existing contract, current surrender quote, values, riders, and prior replacement history.
- Document the consumer profile, objective, time horizon, liquidity need, and existing assets.
- Compare guaranteed and current features, charges, surrender periods, payout options, and insurer strength.
- Consider whether changes to the current contract could address the need at lower cost.
- Complete the prescribed notice and replacement steps before the consumer commits.
- Explain tax treatment cautiously and recommend a tax professional for individualized consequences.
For exam questions, avoid two opposite errors: “replacement is always bad” and “a new contract is always better.” The rule asks whether the recommendation serves the consumer in context and whether required disclosures and supervision occur. A benefit can justify a cost in one case but not another. The same bonus, surrender fee, or rider loss can have different significance depending on the consumer’s time horizon and need for liquidity or guaranteed income.
Exam takeaway
A replacement can include stopping premiums, surrendering or terminating an old contract, assigning it, or financing the new purchase with old policy values. Compare actual surrender proceeds, new charges, lost benefits, guarantees, liquidity, consumer profile, and history. Use current TDI replacement notices, document the recommendation, and never recommend an annuity replacement solely to generate commission.
Replacement is a comparison, not a label. Before concluding that a new annuity is better, identify what the old contract gives up: surrender value, a bonus that has not vested, a market-value adjustment, a favorable guaranteed rate, an income rider base, a death benefit, or an older contract feature that is unavailable now. Then compare the new contract's surrender period, expenses, caps or participation rates, renewal discretion, liquidity, and insurer guarantees. A replacement may be reasonable when the customer's needs have changed and the new benefits justify costs, but a higher illustrated return by itself is not proof. Texas rules and insurer procedures require replacement disclosures and documentation; the official LAC028 form and current TDI instructions should be used. An agent should not recommend replacement solely to generate a commission. In a question, distinguish replacement from an exchange that preserves tax treatment under a separate rule: tax qualification does not establish that the transaction is financially appropriate. Track the application date, delivery of disclosures, old-contract notice, and any free-look or rescission rights stated in the contract.
Common questions
What counts as an annuity replacement in Texas?
TDI’s replacement notice includes a new purchase connected with stopping premiums, surrendering, forfeiting, assigning, terminating an existing contract, or using old contract values to finance the new premium. Financed purchases may count even if the old contract remains in force. Check the current rule and transaction facts.
Is a 1035 exchange automatically in the consumer’s best interest?
No. Tax deferral does not eliminate surrender costs, new charges, lost riders, new restrictions, or the need to evaluate the consumer’s objectives. Confirm tax eligibility separately and document why the new annuity’s benefits justify the costs in that consumer’s circumstances.
Which Texas forms are used for annuity replacement?
TDI lists LAC028, Replacement of Life Insurance or Annuities, and LAC029, Notice Regarding Replacement. The actual required process can depend on current Texas rules and insurer procedures. Check the TDI forms page and complete notices before the consumer commits.
Can an agent recommend replacing an annuity to earn a new commission?
TDI states that it is against the law to recommend an annuity replacement just so the agent can earn commissions. Disclosure of compensation does not cure an improper recommendation. Evaluate benefits, costs, consumer needs, and applicable Chapter 1115 duties.
Should an agent compare a new annuity with changes to the old contract?
Yes. TDI’s consumer notice says changes to an existing contract may address a need at less cost. Compare available payout options, rider changes, and liquidity against replacement costs and benefits; the old contract is not automatically better, but it should be part of a reasonable review.