State RegulationsTX specificDifficulty 3/5
A Texas applicant pays the premiums on a new life policy by taking withdrawals and policy loans from the cash value of an existing life policy. Under the replacement definitions, how is this transaction classified?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
Under TIC 1114.002, a financed purchase is the purchase of a new policy in which funds obtained by withdrawing, surrendering or borrowing against the values of an existing policy are used to pay all or part of the premiums on the new contract, and a financed purchase is expressly included within the definition of a replacement. Practically, a Texas agent cannot avoid the replacement rules by leaving the old policy in force while siphoning its cash value to fund the new one; the notice and statement duties still apply.
Why the other options are wrong
- A) is wrong because the definition reaches financed purchases, so the existing policy staying in force does not take the transaction out of the chapter.
- C) is wrong because neither surrender nor the contestable period is an element of a financed purchase.
- D) is wrong because using existing policy values to finance the new contract is precisely what brings the transaction within the replacement definition.
Memory hook
New policy paid with old policy values equals replacement.