Texas replacement rules and nonforfeiture law

What this page covers

Texas replacement rules and nonforfeiture law close the life-only statutes section of the Texas Life producer exam (InsTX-Life01) outline in force on or after 1 September 2026. These unofficial notes stay with Texas-specific duties. That section carries 10 scored questions. Replacement and nonforfeiture are the last two lettered topics (II.F and II.G; the printed outline skips letter C). Replacement is about swapping or dropping an existing policy for a new one. Nonforfeiture is about the value a permanent policy must leave behind if the owner stops paying.

II.F.1–2 Replacement — purpose and definitions

The purpose of replacement regulation is to make sure the buyer sees what is being given up: contestable period starting over, new suicide period, surrender charges, loss of grandfathered features, and a new commission that may bias the advice. The rules exist because replacements can be suitable and often are not.

Replacement, in the teaching definition, happens when a new life policy or annuity is bought and an existing one is lapsed, forfeited, surrendered, reduced in value, borrowed against beyond a threshold, converted to reduced paid-up or extended term, or otherwise used to fund the new contract. External replacement involves another insurer. Internal replacement involves the same insurer. Some transactions are excepted (for example certain group conversions or credit life), but if a client is dropping policy A to buy policy B, start from the assumption that replacement duties apply until an exception is clear.

II.F.3–4 Duties of the agent and the replacing insurer

The agent’s duties start with a list of the applicant’s existing life insurance and annuities and a signed statement on whether replacement is involved. If it is, the agent gives the applicant the required replacement notice and leaves copies. The application sent to the replacing insurer must flag the replacement. The agent should not tell the client to skip the notice or to hide the old policy. Conservation—trying to keep the old policy—is a right of the existing insurer, not a reason for the replacing agent to stonewall.

The replacing insurance company must require the replacement information, notify the existing insurer, and be able to produce copies of the notices. It must delay issue or delivery as the rule requires so the existing insurer can conserve, and it must keep records. Both sides have duties; the producer cannot assume “the home office will handle the paperwork” if the producer never collected the list of existing policies.

A replacement can still be in the client’s interest—lower cost, better features, a needed rider. The exam point is process: disclose, notify, document, and do not twist. Twisting is a replacement built on misrepresentation. Churning is a replacement built on the producer’s commission rather than the client’s need.

II.G Nonforfeiture law

Texas nonforfeiture law, like the NAIC-style standard nonforfeiture law taught in general knowledge, requires that a permanent individual life policy build a minimum cash surrender value after it has been in force for a stated time and that the owner be offered nonforfeiture options if premiums stop. The usual options are cash surrender, reduced paid-up insurance, and extended term insurance. Automatic election, often extended term, applies if the owner does not choose.

Reduced paid-up uses the cash value as a net single premium to buy a smaller lifetime death benefit with no more premiums. Extended term uses the cash value to buy a level term policy for the full face amount (minus loans) for as many years and days as the money will buy. Cash surrender pays the owner and ends the contract. Outstanding loans reduce what is available under all three.

Universal life expresses the same idea as a cash surrender value after surrender charges. If the account is too thin, there may be little or nothing to forfeit. Term insurance without cash value has no nonforfeiture value to speak of. When you see a Texas life-only item about a lapsed whole-life policy that still provides coverage, look for reduced paid-up or extended term, not for a free gift from the insurer.

Pair this page with the general-knowledge nonforfeiture options under policy provisions. The general page explains the three options. This page adds that Texas requires those protections by statute for covered individual life contracts. Replacement is how a new sale can throw those protections away and restart waiting periods. That is why the two topics sit together at the end of the Texas life-only outline.