What is an example of replacement in insurance?

Replacement in insurance refers to the process of replacing an existing insurance policy with a new one, often to secure better coverage, benefits, or terms. The correct answer illustrates this concept effectively.

In the scenario of canceling a term life insurance policy to purchase a whole life insurance policy, the term life policy is being replaced by a new policy that offers different coverage and features. Whole life insurance typically provides lifelong coverage as well as a cash value component, which distinguishes it from term life insurance that only covers the insured for a specified period without any cash value accumulation. This direct action of replacing one policy type with another aligns with the definition of replacement in the insurance context.

The other choices represent different actions that do not fit the definition of replacement. Buying a second home insurance policy is merely acquiring additional coverage rather than replacing an existing policy. Switching auto insurers for a better rate involves changing providers, not replacing the underlying coverage unless a new policy terminates the old one specifically. Lastly, transferring coverage from one state to another does not inherently involve a replacement but is rather a movement of existing coverage in relation to geographical location.