New York 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. New York 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

Disclosure Statement

The producer must provide the applicant with a Disclosure Statement that includes:

Notice to Existing Insurer

Within 3 business days of receiving the application, the replacing insurer must notify the existing insurer:

• Name of policyholder
• Policy number being replaced
• Name of new insurer
• Type of new coverage

Conservation Period

The existing insurer has 20 days to contact the policyholder:

• Explain the value of existing coverage
• Offer options to preserve the policy
• Cannot make false statements about new insurer
• 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 in New York:

• License suspension or revocation
• Fines up to $1,000 per violation (individual)
• Fines up to $10,000 per violation (insurer)
• Criminal prosecution possible
• Civil liability to harmed consumers

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

New York requires insurers to maintain replacement records for:

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 that must be explained to the client.