Replacement and point-of-sale disclosures (HIPAA, HIV consent)

Two kinds of paperwork at the point of sale

When a producer sits down with an applicant, two families of documents change hands before anything is submitted. The first family exists because the sale may replace something the applicant already owns. The second exists because the application asks for, and the underwriter will go and get, deeply personal information -- medical records, credit history, and possibly an HIV test. The exam treats both as disclosures: written notices the producer must deliver, explain, and in most cases have the applicant sign, at or before the time of application.

Replacement

A replacement occurs when a new life insurance policy or annuity is purchased and, as part of or because of that purchase, an existing policy or contract is lapsed, forfeited, surrendered, converted to reduced paid-up or extended term insurance, borrowed against heavily, or otherwise reduced in value. The transaction is not illegal. It is regulated, because replacement so often harms the consumer: the new contract starts a fresh contestable period and suicide exclusion, a fresh surrender-charge schedule, and a fresh set of acquisition costs, while the old contract's cash value and guaranteed rates may be lost. The point of replacement regulation is to make sure the applicant makes that trade with full information, and that the existing insurer gets a chance to conserve the business.

The producer's duties

• Ask. Every life or annuity application includes a question about whether the

proposed purchase will replace existing coverage, and the producer must record the answer.

• Deliver the Notice Regarding Replacement. If the answer is yes, the producer gives

the applicant a Notice Regarding Replacement of Life Insurance or Annuities, no later than the time the application is taken. Both the applicant and the producer sign it, and the applicant keeps a copy.

• List the existing contracts. The notice or the application lists every policy or

contract being replaced, by insurer and policy number.

• Leave the sales material. The producer leaves with the applicant copies (or a

signed list) of every sales proposal and illustration used in the presentation.

• Submit it all with the application. The replacing insurer receives the signed

notice, the list of contracts, and the sales material along with the application.

The replacing insurer's duties

The replacing insurer notifies each existing insurer that a replacement is proposed, generally within a few business days of receiving the application, and on request sends a copy of the sales proposal. It also gives the new policyholder an extended free-look period on a replacement policy so the decision can be unwound if the comparison turns out badly. The existing insurer may respond with a conservation effort -- a letter or call explaining what the policyholder is giving up.

Annuity replacement: the suitability lens

For annuities the replacement analysis is written into the suitability statute. Before recommending an exchange or replacement, the agent must consider the whole transaction: whether the consumer will incur a surrender charge or start a new surrender period; whether the consumer will lose existing benefits such as death, living, or other contractual benefits, or face higher fees or rider charges; whether the new product would substantially benefit the consumer over its life compared with the old one; and whether the consumer has had another exchange or replacement within the preceding 60 months. A pattern of replacements every few years is the classic red flag for churning. Before any annuity recommendation the agent also hands the consumer a written agent disclosure form describing the agent's role, which products the agent is licensed to sell, and whether the agent represents one insurer, several, or several while primarily contracted with one.

Privacy and consent disclosures

HIPAA authorization

The underwriter will request medical records from physicians, hospitals, and pharmacies. Under the federal Health Insurance Portability and Accountability Act (HIPAA) privacy rule, those providers may not release protected health information to an insurer without the individual's written authorization. The application therefore includes a HIPAA-compliant authorization that the applicant signs at the point of sale. It names who may release information and to whom, describes what may be released, states its purpose, carries an expiration date, and tells the applicant of the right to revoke it. Without it the file stalls; underwriting cannot proceed on a blank authorization.

Privacy notice and information-practices notices

Several other notices are delivered at or near the time of application and require no signature:

• A privacy notice (under the Gramm-Leach-Bliley Act and state insurance privacy

laws) explaining how the insurer collects, uses, and shares nonpublic personal information and how the applicant can opt out of sharing with non-affiliated parties.

• A Fair Credit Reporting Act (FCRA) pre-notice telling the applicant that an

investigative consumer report -- a report on character, reputation, and mode of living gathered through interviews -- may be ordered, and that the applicant may request its nature and scope and dispute inaccurate information.

• An MIB pre-notice disclosing that the insurer may report medical information to,

and obtain it from, the Medical Information Bureau, a member-owned exchange of coded underwriting information.

HIV consent

If the underwriting requirements include a blood test that will be screened for HIV, the applicant must first give written informed consent on a separate, plainly worded form. Florida's general HIV-testing statute makes the pattern clear: before a test in a nonhealth-care setting the provider must obtain informed consent, preceded by an explanation of the person's right to confidential treatment of both identity and result. The same statute then defers to the insurance code for insurers and others in the application and underwriting process, so insurance HIV testing follows its own dedicated provision rather than the public-health rule -- but the consent-and-confidentiality structure is the same.

In practice the insurance form does three things. It explains what the test is, that it will be performed on the applicant's blood or other specimen, and that a positive result may affect insurability. It obtains the applicant's signature authorizing the test. And it covers disclosure: results are confidential, are released only to the applicant (or a physician the applicant designates), to the insurer's underwriters and reinsurers who need them, and as required by law -- and a positive result comes with information on counseling and follow-up. A test run without consent, or results shared outside those limits, exposes the insurer and producer to regulatory penalties.

The rest of the point-of-sale package

Two more documents round out what the producer hands over. The Buyer's Guide is a generic, regulator-approved booklet explaining the types of life insurance and how to shop for it. The Policy Summary (or statement of policy cost and benefit information) is specific to the policy applied for: premiums, cash values, death benefits, and cost indexes by year. Both must be delivered no later than policy delivery, and the Buyer's Guide is often delivered with the application. Together with the replacement notice and the consent forms they make up the paper trail the producer is responsible for at the kitchen table.

Putting it together

The producer's obligations at the point of sale reduce to a checklist. Is this a replacement? If so, the notice, the signatures, the list of existing contracts, and the sales material go in with the application, and for an annuity the whole-transaction suitability analysis is documented. Will we look at private information? Then the HIPAA authorization is signed, the privacy, FCRA, and MIB notices are given, and, if an HIV screen is part of the requirements, the applicant signs an informed-consent form first. Nothing here is optional, and every one of these documents exists because the applicant is entitled to know what is being given up and what is being looked at before the offer is made.