A producer takes an application for a new life policy that the applicant intends to fund by withdrawing cash values from a policy he already owns, which will reduce the old policy's benefits. How should the producer treat this transaction?

Why D is correct

Under Tenn. Comp. R. & Regs. 0780-1-24-.03, replacement reaches transactions in which the new life insurance purchase causes existing coverage to be reduced, including funding a new policy through cash-value withdrawals. The producer must therefore apply the replacement procedures of Tenn. Comp. R. & Regs. 0780-1-24-.05 rather than treating the deal as ordinary business.

Why the other options are wrong

• A) Labeling the funding route an ordinary payment arrangement ignores that the old policy's benefits are being diminished to pay for the new one.
• B) No claim is being made against the old policy; the applicant is purchasing new coverage, which is what triggers the replacement definition.
• C) The producer is the one soliciting the new policy, so the producer squarely carries the replacement duties and cannot walk away from them.

Memory hook

Draining the old policy's cash to buy the new one is still a replacement.