Oregon Replacement of Life Insurance and Annuities

Replacement of life insurance and annuities in Oregon

Replacing one life insurance policy or annuity with another can be the right decision for a client, and it can also cost them a great deal: a new contestable and suicide period, new surrender charges, a higher premium at an older age, and benefits in the old contract that are simply lost. Oregon regulates replacement so that a buyer makes that decision with full information.

Replacement (ORS 746.085; OAR 836-080-0001 to 0043)

ORS 746.085 authorizes the Director to require anyone who replaces, or offers to replace, existing life insurance to leave the policyholder a written, signed and dated statement that fully and correctly compares the existing policy with the proposed one. The statute also allows the Director to limit the commission on a replacement of a policy with nonforfeiture values to what the producer would have earned if both policies had been carried by the replacing insurer.

The Director’s rules, OAR 836-080-0001 to 836-080-0043, follow the NAIC Life Insurance and Annuities Replacement Model Regulation. Their purpose is to make sure the purchaser receives the information needed to decide in their own best interest, to reduce the opportunity for misrepresentation and incomplete disclosure, and to set penalties for failing to comply. In these rules a life insurance policy is called a policy and an annuity is called a contract.

What counts as a replacement (OAR 836-080-0005)

A replacement is a transaction in which a new policy or contract is purchased and the producer (or the insurer, if no producer is involved) knows or should know that, because of the transaction, an existing policy or contract has been or will be:

• Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer, or otherwise terminated
• Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by using nonforfeiture benefits or other policy values
• Amended to reduce benefits or the term of coverage
• Reissued with any reduction in cash value
• Used in a financed purchase

A financed purchase uses money obtained by withdrawing, surrendering or borrowing values from an existing policy to pay premiums on a new one. If the values of an existing policy are used to pay premiums on a new policy from the same insurer within four months before or 13 months after the new policy’s effective date, that is treated as evidence the purchase was financed.

What the rules do not cover (OAR 836-080-0001(4))

The replacement rules generally do not apply to credit life insurance; group life insurance or group annuities with no direct solicitation of individuals by a producer; exercising a contractual change or conversion privilege with the existing insurer; replacing coverage under a binding or conditional receipt with the same insurer; policies funding ERISA and other employer retirement plans; coverage paid for entirely by the employer or an association; non-convertible term that will expire in five years or less and cannot be renewed; immediate annuities purchased with proceeds from an existing annuity contract; and structured settlements.

Duties of the producer (OAR 836-080-0014)

• With every application, the producer submits a statement signed by both the applicant and the producer saying whether the applicant has existing policies or contracts, and (if the insurer asks) whether any will be replaced. If the answer is no, the producer’s replacement duties end there
• If the applicant has existing coverage that will be replaced or used to finance the purchase, the producer must present and read to the applicant, no later than when the application is taken, the Notice Regarding Replacement. The applicant may decline to have it read aloud. Both sign it, and a copy is left with the applicant
• The notice lists each policy or contract to be replaced or used for financing, by insurer, insured and policy number
• The producer leaves the applicant the original or a copy of all sales material used. Sales material presented electronically is provided in printed form no later than policy delivery
• The producer submits to the replacing insurer a copy of each required document and copies of the sales material and illustrations used

Duties of the replacing insurer (OAR 836-080-0029)

• Verify the required forms are received and complete
• Notify each existing insurer within five business days of receiving an application that indicates replacement, and send a policy illustration or summary on request within five business days
• Keep the replacement notices for at least five years
• Give the policyholder notice of the right to return the new policy or contract within 30 days of delivery for an unconditional full refund of premiums (for variable and market-value-adjusted products, the cash surrender value plus fees and charges deducted)
• Where the replacing and existing insurer are the same or affiliated, give credit for the time already elapsed under the old policy’s incontestability and suicide periods, up to the old face amount

Duties of the existing insurer (OAR 836-080-0034)

The existing insurer keeps the replacement notices it receives, and sends the policyholder a letter offering information on the existing policy’s values, including an in-force illustration or policy summary. It also sends a notice, whenever a policyholder borrows, surrenders or withdraws policy values, that doing so may affect the policy’s guaranteed and non-guaranteed elements, face amount or surrender value.

Violations (OAR 836-080-0043)

A failure to comply is an unfair trade practice under ORS 746.240. Examples include:

• Deceptive or misleading sales material
• Failing to ask the applicant the questions about replacement and financing
• Intentionally recording an answer incorrectly
• Advising an applicant to answer “no” to a replacement question so that the existing insurer is not notified
• Advising a policyholder to write to the insurer in a way that hides the identity of the replacing producer or insurer

A pattern of a producer’s clients replacing coverage after stating on the application that they did not intend to is treated as evidence that the producer knew a replacement was intended.

Sidenote

Know this...

Replacement is not prohibited. What Oregon prohibits is replacement without the disclosures. Twisting, a replacement induced by misrepresenting the old or new policy, is a separate violation: ORS 746.075 prohibits misrepresentation used to induce a policyholder to lapse, surrender, exchange or convert a life policy.

Suitability in the sale of life insurance (OAR 836-080-0090)

A person may not recommend the purchase, sale or replacement of a life insurance policy, or any rider, endorsement or amendment, without reasonable grounds to believe the recommendation is not unsuitable, based on a reasonable inquiry into the consumer’s insurance objectives, financial situation and needs, age, and other relevant information. When a group life policy is recommended, the “consumer” is the intended group policyholder.

Continuing coverage when a group life policy is replaced (ORS 743.356)

Replacement also happens at the group level, when an employer moves its group life plan to a new insurer. Oregon protects disabled certificate holders in that transition. When a group life policy is replaced by another group life policy, the insurer whose policy is being replaced must continue coverage for each certificate holder under the replaced policy whose premium payments are suspended because the certificate holder is disabled.

A worker whose premiums were waived because of disability therefore does not lose life coverage because the employer changed carriers.

Lesson summary

• ORS 746.085 lets the Director require a written, signed comparison of the existing and proposed policies, and limit commissions on replacements of policies with nonforfeiture values.
• A replacement occurs when a new policy or contract is bought and an existing one is lapsed, surrendered, converted to reduced paid-up or extended term, reduced, reissued with less cash value, or used in a financed purchase (OAR 836-080-0005).
• The producer obtains a signed statement about existing coverage with every application. When replacement is involved, the producer reads the Notice Regarding Replacement to the applicant, both sign it, and the producer leaves copies of all sales material (OAR 836-080-0014).
• The replacing insurer notifies the existing insurer within five business days and gives a 30-day right to return the new policy for a full refund (OAR 836-080-0029).
• Failing to follow the rules, including advising an applicant to deny a replacement, is an unfair trade practice (OAR 836-080-0043).
• A life insurance recommendation, including a replacement, requires reasonable grounds to believe it is not unsuitable (OAR 836-080-0090).
• When a group life policy is replaced, the old insurer must continue coverage for certificate holders whose premiums are suspended because of disability (ORS 743.356).