Texas Life Insurance Replacement Practice Questions

A replacement question is not simply asking whether a customer buys a new policy. It asks what the new transaction does to an existing life policy or annuity and what information must be exchanged before the customer proceeds. Texas Insurance Code Chapter 1114 covers certain life-insurance and annuity replacements and financed purchases. It does not apply to every transaction; the statute contains exclusions, so read the product and facts in the stem.

The Texas Life Agent outline includes replacement and cites Chapter 1114. The following original questions practice the agent’s notice duties and related definitions. They are not actual Pearson questions. For each item, identify the existing contract, the transaction’s effect, the person with the duty, and the timing.

Question 1: a new policy will surrender the old one

The timing phrase is a common trap: no later than when taking the application. The notice is not a post-issue formality. It is designed to give the purchaser information while deciding whether to proceed. The agent and applicant sign it, with the signature attesting that the notice was read aloud or the applicant chose not to have it read aloud. An electronic signature changes how the insurer delivers the copy: the statute requires a mailed copy by the third business day after the insurer receives the application.

Question 2: borrowing from the old policy to pay new premiums

This distinction matters because the customer may still see the old policy as “kept.” A loan can nevertheless reduce cash value, increase outstanding debt, affect the death benefit or future performance, and make the old policy harder to maintain. The statute’s consumer-protection purpose includes informing purchasers about replacement consequences and reducing misrepresentation or incomplete disclosure. A new contract’s illustration does not make the old policy’s costs disappear.

Question 3: the applicant says there are no existing policies

The signed statement is important even when the answer is “no.” It records whether the applicant has existing policies, rather than leaving the insurer to infer that no replacement is intended. If the answer is “yes,” the next step is not automatically to stop the sale; it is to identify the affected policies, provide the required notice, and follow the rest of the applicable requirements.

Question 4: replacement notice and copies of sales material

What counts as replacement?

Under Chapter 1114, the core definition asks whether a new policy or contract is being purchased and the proposing agent or insurer knows, or should know, that an existing policy or contract will be affected by the transaction. Examples include lapsing, forfeiting, surrendering, partially surrendering, assigning to a replacing insurer, or otherwise terminating the existing coverage. It also includes using policy values in a financed purchase.

• An existing policy can be replaced even if it is not formally canceled; a reduction in benefits or coverage term by using policy values can count.
• A financed purchase includes funds from surrendering, withdrawing, or borrowing against existing policy values to pay premiums due on the new contract.
• Chapter 1114 defines an existing policy or contract to include an individual life policy or annuity in force, including certain policies within an unconditional refund period.
• The law has listed exceptions, including credit life and some group coverage, contractual changes or conversions handled with the issuing insurer, certain employer-funded coverage, and other specifically named transaction types. Do not assume every exchange is covered or exempt without matching the facts to §1114.004.

For a test item, do not use a casual definition such as “any time somebody buys a new policy.” Instead, look for the connection between the new sale and the existing contract. Is the old policy surrendered, reduced, used as collateral, or supplying money for the new premiums? Does the law’s definition or an explicit exemption fit? The phrase “known or should be known” prevents an agent from avoiding the analysis by ignoring obvious facts.

Separate the agent’s duties from the insurer’s duties

The agent handles the application statement, timely replacement notice, copies of sales materials, and documents that accompany the application. The insurer has separate supervision, review, and monitoring duties. An insurer must have systems to train agents, communicate its position on acceptable replacements, review certain transactions, confirm compliance, detect unreported replacements, and retain required records.

The replacing insurer also checks whether required forms were received and are complete. When a replacement is involved, it must notify an affected existing insurer no later than the fifth business day after receiving a completed application indicating replacement or after identifying an unreported replacement. This fifth-business-day duty belongs to the replacing insurer, not the agent’s deadline for giving the customer the notice.

At delivery, the replacing insurer must give the owner notice of a right to return the replacement contract within 30 days for the stated refund treatment. This is another common distractor: the applicant’s replacement notice is due by application time, while the return notice applies after delivery. They protect the consumer at different stages and have different actors.

How to answer a replacement question quickly

1. Underline what happens to the existing policy: lapse, surrender, reduced paid-up, loan, withdrawal, reduced value, or no change.
2. Ask whether the existing value funds any premium on the new policy. Borrowed value counts in a financed purchase.
3. Check the scope and any stated exemption under Chapter 1114; do not assume that a change or conversion is always covered.
4. Identify the actor. Agent, replacing insurer, and existing insurer have different duties.
5. Attach the deadline to the correct duty: application-time notice, five-business-day insurer notification, delivery-stage return notice.
6. Choose the answer that matches only the facts and duty in the stem. Do not add extra steps or relax a required one.

The outline puts replacement among Texas life statutes, so expect questions to test the statutory duty rather than just the consumer concept. When a choice sounds plausible, ask whether it names the right actor and deadline. A correct rule attached to the wrong actor is still wrong.