Key Takeaways
- North Carolina requires written notice and comparison when replacing life insurance or annuities
- Producers must provide a Replacement Notice to the applicant before replacement transactions
- The replacing insurer must notify the existing insurer of the pending replacement
- Records of replacement transactions must be maintained for at least 5 years
- Twisting (misrepresenting to induce replacement) is a serious violation with severe penalties
North Carolina 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. North Carolina has detailed 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
Required Disclosures
Replacement Notice
The producer must provide the applicant with a Replacement Notice that includes:
| Item | Requirement |
|---|---|
| Comparison | Side-by-side of existing and new policy |
| Surrender Values | Current and projected values |
| Death Benefits | Comparison of coverage amounts |
| Premium Costs | Cost difference over time |
| Surrender Charges | Charges for early termination |
| New Contestability | New 2-year period starts |
| Tax Consequences | Potential tax implications |
Notice to Existing Insurer
The replacing insurer must notify the existing insurer:
- Within a reasonable time after application
- Name of policyholder
- Policy number being replaced
- Name of new insurer
- Type of new coverage
Conservation Period
The existing insurer has the opportunity to:
- Contact the policyholder
- Explain the value of existing coverage
- Offer options to preserve the policy
- Must respect policyholder's final decision
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
- Significant fines
- 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
Records Retention
North Carolina requires insurers and producers to maintain replacement records:
| Record Type | Retention Period |
|---|---|
| Replacement notices | 5 years |
| Comparison statements | 5 years |
| Suitability documentation | 5 years |
| Client correspondence | 5 years |
Producer Responsibilities
Before recommending a replacement, the producer must:
- Compare the existing and proposed policies objectively
- Consider whether replacement is in client's best interest
- Disclose all relevant information including costs
- Document the basis for the recommendation
- 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.
How long must replacement transaction records be maintained in North Carolina?
What is the term for misrepresenting an existing policy to induce replacement?