Definition:

New life insurance purchased and existing policy is:
- Lapsed: Allowed to terminate
- Surrendered: Cashed in
- Converted: Changed to different type
- Reduced: Coverage decreased
- Used as collateral: For loan for new policy
- Reissued: With reduction in cash value

Timeframe: Within 60 months (5 years) of new policy

Triggers:
- Replacing life insurance with life insurance
- Replacing life insurance with annuity
- Replacing annuity with life insurance
- Internal replacement (same company)
- External replacement (different company)

Does NOT apply:
- Adding coverage (no reduction of existing)
- Group insurance conversions
- Credit life insurance
- Employer-paid group life

Existing insurer's right to retain business:

What Is Conservation?

Efforts to keep policy in force:
- Explain existing policy benefits
- Offer policy modifications
- Adjust premiums or coverage
- Agent contact with policyowner
- Compare new vs. existing coverage

Example:

Policyowner considering replacement
Existing insurer notified

Conservation actions:
- Agent explains current policy advantages
- Reviews cash value accumulation
- Offers reduced premium through paid-up additions
- Shows policy has better features than proposed

Result: Policyowner keeps existing policy

Insurer's right:
- May contact policyowner
- May send conservation materials
- May offer incentives to keep policy
- Cannot harass or mislead

Notice Regarding Replacement

When provided: At or before application

Who provides: Replacing agent

Content:
- Explains replacement
- Lists advantages and disadvantages
- Warns about potential issues
- Describes free look period
- States existing insurer will be notified

Must be signed by:
- Applicant
- Agent

Comparative Information Form

Side-by-side comparison:

Compares:
- Premiums (existing vs. new)
- Cash values (current and projected)
- Death benefits
- Policy loans outstanding
- Surrender charges
- Riders and benefits
- Costs over time

Example comparison:

                    Existing    Proposed
Annual Premium:     $1,200      $1,500
Death Benefit:      $250,000    $500,000
Cash Value (now):   $25,000     $0
Cash Value (20yr):  $65,000     $75,000
Surrender Charge:   $0          $5,000

Replacement Notice to Existing Insurer

Replacing company must notify:
- Within 5 business days
- Name of existing insurer
- Policy being replaced
- Policyowner information

Allows existing insurer to:
- Contact policyowner
- Begin conservation efforts
- Provide additional information

Disclosure Requirements

Agent must:

1. Ask about existing coverage:
2. At beginning of sales process
3. Document on application

4. If replacement involved, follow procedures

5. Provide notice at or before application:

6. Notice Regarding Replacement form
7. Explain replacement implications

8. Get signature

9. Complete comparison:

10. Side-by-side analysis
11. Show existing vs. proposed

12. Provide copy to applicant

13. Document reasons:

14. Why replacement recommended
15. Benefits outweigh costs

16. In client's best interest

17. Notify existing insurer:

18. Within 5 business days
19. Through replacing insurer

Suitability Requirement

Replacement must be suitable:

Consider:
- Client's age and health
- New underwriting (may not qualify)
- New contestable period
- New suicide exclusion period
- Surrender charges on existing
- Loss of benefits in existing policy
- Cost comparison
- Tax implications

Unsuitable replacement examples:

Age 75, replacing 20-year-old policy:
- Loses incontestable protection
- New 2-year contestable period
- Higher premiums at older age
- May not qualify medically

Replacing whole life with term:
- Loses cash value
- Term expires at age 80
- No coverage in later years

Twisting

Misrepresenting to induce replacement:

Examples:
- Exaggerating defects of existing policy
- Concealing disadvantages of new policy
- Making false comparisons
- Incomplete disclosure of costs

Illegal and grounds for:
- License revocation
- Criminal charges
- Civil liability

Churning

Replacing for agent's benefit, not client's:

Characteristics:
- Frequent replacements
- Primary benefit to agent (commissions)
- Little/no benefit to client
- Internal replacements for commission

Example:

Agent replaces client's policies every 2-3 years
Each time:
- Agent earns new first-year commission
- Client pays new surrender charges
- Client restarts contestable period
- No material benefit to client

Result: Churning - illegal

Conservation by Misrepresentation

Existing insurer misleading to prevent replacement:

Examples:
- Exaggerating benefits of keeping policy
- Misrepresenting new policy features
- Threatening loss of benefits
- Delaying processing of surrender

Also illegal

Extended protection:

Typical requirements:
- 30 days (vs. 10 days for new policies)
- Full refund of premiums
- No questions asked
- Extra time to reconsider

Important:
- Do NOT cancel existing policy until new policy free look expires
- Keep old policy in force during free look
- If return new policy, still have old coverage

Required documentation:

Agent must maintain:
- Notice Regarding Replacement (signed)
- Comparative information
- Reasons for recommendation
- All replacement forms

Retention period:
- Minimum 5 years
- From date of sale

Insurer must maintain:
- All replacement documentation
- Agent certifications
- Notifications sent/received
- 5 years minimum

Same company:

Still replacement if:
- Existing policy reduced, lapsed, or surrendered
- Cash value reduced
- Policy reissued with less benefit

Requirements:
- Same disclosure rules apply
- Must be suitable
- May have special rules
- Commission limits may apply

Example:

Client has whole life with Company A
Agent proposes new universal life with Company A
Surrenders whole life to fund new UL

Result: Internal replacement
Requires: Full replacement disclosure and procedures

Tax-free exchanges:

Allowed exchanges:
- Life insurance → Life insurance
- Life insurance → Annuity
- Annuity → Annuity
- NOT: Annuity → Life insurance (taxable)

Requirements:
- Direct transfer (not constructive receipt)
- Same insured/annuitant
- Same owner
- Full replacement disclosure still required

Tax benefit:
- No taxable gain on exchange
- Basis carries over to new policy
- Defers taxation

• Replacement definition: New coverage purchased, existing policy lapsed/surrendered/reduced
• 60-month rule: Applies within 5 years of new policy
• Conservation: Existing insurer's efforts to retain business
• Notice Regarding Replacement: Provided at or before application
• Must be signed: By applicant and agent
• Comparative information: Side-by-side comparison of existing vs. proposed
• Notify existing insurer: Within 5 business days
• Agent responsibilities: Ask about existing, provide notice, compare policies, document reasons
• Suitability: Replacement must be in client's best interest
• Twisting: Misrepresenting to induce replacement - illegal
• Churning: Replacing for agent's benefit - illegal
• Free look for replacement: Typically 30 days (longer than new policies)
• Do not cancel old policy: Until new policy free look expires
• Record retention: 5 years minimum
• Internal replacement: Same company replacements also regulated
• 1035 exchange: Tax-free exchange, but still requires replacement disclosure