Replacing Life Insurance and Annuities in Wisconsin

Replacing a life insurance policy or annuity is sometimes the right move. A newer policy may be cheaper, or a client’s needs may have changed. It is also one of the easiest ways to harm a client: the old policy’s cash value, paid-up acquisition costs and expired contestable period can be given up for a policy that starts those clocks over. Wisconsin’s replacement rule, s. Ins 2.07, Wis. Adm. Code, does not forbid replacement. It requires a disclosure process so that the client decides with the facts “in the purchaser’s best interest,” and it gives the existing insurer a chance to make its case.

What Counts as a Replacement

A replacement occurs when a new policy or annuity is bought and the producer knows, or should know, that because of the transaction an existing policy or contract 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, 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; or
• used in a financed purchase (s. Ins 2.07 (3) (i)).

Notice how wide this is. Taking reduced paid-up on an old whole life policy to free up money for a new one is a replacement, even though the old policy stays in force. So is a partial surrender.

Definitions

Financed purchase

Buying a new policy with money withdrawn, surrendered or borrowed from an existing policy’s values. When a regulator reviews a transaction, using values within 4 months before or 13 months after the new policy’s effective date, for a new policy from the same insurer to the same owner, is prima facie evidence that the purchase was financed (s. Ins 2.07 (3) (d)).

Existing policy or contract

An individual life policy or annuity in force, including one under a binding or conditional receipt or still within an unconditional refund period (s. Ins 2.07 (3) (c)).

What the rule does not cover

The rule applies to the solicitation of life insurance and annuities covering Wisconsin residents. The main exemptions in s. Ins 2.07 (2) are:

• credit life insurance;
• group life or group annuities with no direct solicitation of individuals by a producer;
• a contractual change or conversion privilege exercised with the insurer that issued the existing policy;
• an existing non-convertible term policy that will expire in 5 years or less from its date of issue and cannot be renewed;
• immediate annuities bought with proceeds of an existing annuity (but not immediate annuities bought with proceeds of a life policy); and
• structured settlements.

Registered contracts (variable life and variable annuities) are covered, except that a prospectus and the premium or contribution amounts take the place of the illustration or policy summary (s. Ins 2.07 (2) (k)).

The Producer’s Duties, Step by Step

1. Ask about existing coverage. 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. If the answer is “no,” the producer’s replacement duties are complete (s. Ins 2.07 (4) (a)).

2. If “yes,” present and read the notice. No later than when the application is taken, the producer must present and read aloud the Important Notice: Replacement of Life Insurance or Annuities (Appendix I to s. Ins 2.07). The notice lists each policy that may be replaced or used for financing by insurer, insured or annuitant, and policy number, and states whether each will be replaced or used as a source of financing (s. Ins 2.07 (4) (b), (c)). Both sign it, and a copy is left with the applicant. An applicant who does not want it read aloud initials a box on the form saying so.

3. Leave the sales material. When the application is completed, the producer leaves the applicant the original or a copy of all sales material used. Material presented on a screen must be given to the client in printed form no later than policy delivery (s. Ins 2.07 (4) (d)).

4. Send everything to the insurer. The producer submits copies of the signed forms, a statement identifying any company-approved sales material used, and copies of any individualized material, including illustrations (s. Ins 2.07 (4) (e)).

What the notice tells the client

The Appendix I notice is written to make the client stop and compare. It warns that the client “will pay acquisition costs and there may be surrender costs deducted,” that “new policies usually take longer to build cash values and to pay dividends,” that “claims on most new policies for up to the first two years can be denied based on inaccurate statements,” and that “suicide limitations may begin anew on the new coverage.” It asks whether premiums are affordable and could change, whether the client’s health has changed since the old policy was bought, whether the exchange would be tax-free, and whether the existing insurer would modify the current policy instead. It also tells the client that the existing insurer must send an in-force illustration, policy summary or disclosure document on request.

A producer who walks through these questions honestly is doing exactly what the rule intends. A producer who rushes through them, or tells the client to initial the “do not read aloud” box to save time, is defeating it.

The Insurers’ Duties

The replacing insurer must verify that the forms are complete and notify every existing insurer within 5 business days of receiving an application that shows a replacement (s. Ins 2.07 (6) (a) 2.). It must give the owner notice of the right to return the new policy within 30 days of delivery for an unconditional full refund of premiums, fees and charges. For a variable or market value adjusted contract, the refund is the cash surrender value plus fees and charges deducted (s. Ins 2.07 (6) (a) 4.). When the replacing and existing insurers are the same or affiliated, the new policy must credit the time already elapsed under the old policy’s incontestability and suicide periods, up to the old face amount (s. Ins 2.07 (6) (b)).

The existing insurer, once notified, must send the owner a letter explaining the right to receive information about the existing policy’s values, including an in-force illustration if available, or a policy summary if an illustration cannot be produced within 5 business days of the notice. It must provide the information within 5 business days of the owner’s request (s. Ins 2.07 (7) (b)). When an owner asks to borrow, surrender or withdraw values, the existing insurer must send notice that doing so may affect the policy’s guarantees, face amount or surrender value (s. Ins 2.07 (7) (c)).

Every insurer that uses producers must also supervise replacements: it tracks each producer’s replacements and lapses as a percentage of annual sales, looks for unreported replacements, and keeps the replacement documents for at least 5 years after the new policy ends (s. Ins 2.07 (5)).

When a sale is made by mail, telephone or internet with no producer, the insurer itself asks the replacement question and sends the appropriate notice (s. Ins 2.07 (8)).

Annuity Replacements

For annuities, the replacement notice is only part of the obligation. Wisconsin’s best interest law requires a producer recommending an annuity exchange or replacement to consider the whole transaction, including whether the client will pay a surrender charge, start a new surrender period, lose death or living benefits, or pay higher fees; whether the new annuity would substantially benefit the client over the life of the product; and whether the client has had another annuity exchange or replacement, particularly within the preceding 60 months (s. 628.347 (2b) (g), Wis. Stat.).

Violations

Failing to comply with s. Ins 2.07 is a violation of s. 628.34 (unfair marketing practices) and is subject to the penalties of s. 601.64 (s. Ins 2.07 (9)). The rule names these examples:

• deceptive or misleading information in sales material;
• failing to ask the replacement and financing questions;
• intentionally recording an answer incorrectly;
• advising an applicant to answer “no” to the replacement question so the existing insurer is not notified; and
• advising an owner to write to the existing insurer in a way that hides the replacing producer or insurer.

A client may replace a policy after saying replacement was not intended. But when a pattern of such cases shows up among one producer’s clients, the pattern is prima facie evidence that the producer knew replacement was intended and intended to violate the rule (s. Ins 2.07 (9) (b)). A violation does not change the insurer’s duty to pay claims.

Sidenote

Replacement versus twisting

Replacement is lawful when the disclosure process is followed. Using misrepresentation or an incomplete comparison to persuade a client to replace is twisting, an unfair marketing practice in its own right.

Lesson summary

• A replacement includes surrender, lapse, reduction in value, reduced paid-up, extended term, amendment that cuts benefits, and financed purchases.
• Using an existing policy’s values to pay premiums on a new policy from the same insurer, within 4 months before or 13 months after its effective date, is prima facie evidence of a financed purchase.
• The producer obtains a signed statement on existing coverage with every application; if there is coverage, the producer reads, signs and leaves the Appendix I notice and leaves all sales material.
• The replacing insurer notifies existing insurers within 5 business days and offers a 30-day right to return for a full refund.
• The existing insurer tells the owner of the right to information on the existing policy and provides it within 5 business days of the owner’s request.
• Annuity replacements must also weigh surrender charges, lost benefits and any replacement within the preceding 60 months.
• Coaching a “no” answer, hiding the replacing producer, or a pattern of unreported replacements violates s. 628.34.