Key Takeaways
- Virginia requires written notice and comparison when replacing life insurance or annuities
- Producers must provide a signed Replacement Notice to the applicant
- The replacing insurer must notify the existing insurer within 5 business days
- Replacement records must be maintained for at least 5 years
- Twisting and churning are prohibited practices subject to penalties
Virginia 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. Virginia 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 |
Notice to Existing Insurer
Within 5 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 an opportunity 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:
- License suspension or revocation
- 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
Virginia requires producers and insurers 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.
Within how many business days must the replacing insurer notify the existing insurer of a replacement in Virginia?
How long must replacement records be maintained in Virginia?