Arizona Replacement Rules

Replacement occurs when a new life insurance policy or annuity is purchased with the intent to terminate, surrender, or reduce coverage under an existing policy. Arizona has regulations to protect consumers from unsuitable replacements.

Definition of Replacement

A replacement occurs when a new policy is purchased and:

• An existing policy is lapsed, forfeited, or surrendered
• Policy values are reduced or borrowed
• Coverage is converted or reduced
• Policy is reissued with reduced values
• Policy is amended to reduce benefits

Duties of the Producer

When replacement is involved, the producer must:

Disclosure Requirements

Producer Declaration

The producer must:

• Determine whether a replacement is involved
• Complete required replacement forms
• Submit copies to both insurers
• Retain copies for at least 5 years

Duties of the Replacing Insurer

The replacing insurer must:

Notice to Existing Insurer

• Send notice of pending replacement
• Include applicant information
• Provide copy of replacement notice
• Allow existing insurer opportunity to conserve

Prohibited Practices

Twisting

Twisting is the practice of misrepresenting the terms or benefits of an existing policy to induce a policyholder to replace it.

Examples of twisting:

• Falsely claiming existing policy is "worthless"
• Misrepresenting surrender values
• Hiding surrender charges of replacement
• Exaggerating benefits of new policy

Penalties for twisting:

• License suspension or revocation
• Fines up to $1,000 per violation
• Civil liability to harmed consumers
• Criminal prosecution in severe cases

Churning

Churning is excessive replacement of policies to generate commissions:

Red flags for churning:

• Multiple replacements in short periods
• Same client replacing policies repeatedly
• Pattern across producer's book of business
• Surrender charges not disclosed
• Commission-driven rather than client-focused

Records Retention

Arizona requires replacement records be maintained:

Producer Responsibilities

Before recommending a replacement, the producer must:

1. Compare the existing and proposed policies objectively
2. Consider whether replacement is in client's best interest
3. Disclose all relevant information including costs
4. Document the basis for the recommendation
5. Ensure client understands the consequences

Exam Tip: Remember that a new 2-year incontestability and suicide exclusion period begins with a replacement policy. This is an important disclosure item.