Replacement of health insurance

What replacement means

Replacement happens when a person drops, lapses, surrenders or lets go of an existing health insurance policy and buys a new one to take its place. Changing coverage is sometimes the right move: the new plan may cost less, fit the client's needs better, or fix a gap the old one left open. But replacing health coverage also carries real risks for the insured, so producers are expected to handle it carefully and honestly.

What the insured can lose

When a new health policy replaces an old one, the insured may give up protections they have already earned:

• New pre-existing condition limits. A pre-existing condition limitation restricts benefits for a condition because it was present before the date of enrollment in the new coverage, whether or not the person was diagnosed or treated for it. Time already served under the old policy may not count toward the new one.
• New waiting, elimination and probationary periods. Benefits for certain conditions or services may not begin until the new policy's waiting periods are satisfied again.
• A new contestable period. Statements on the new application can be challenged by the insurer for a fresh period, even if the old policy was long past that point.
• Higher premium from attained age. The new policy is priced at the insured's current age and health, not the age at which the old policy was bought.
• Lost benefits or riders. Features of the old contract, such as renewability terms or benefits that are no longer sold, may not be available again.
• Being declined. If the insured's health has changed, the new insurer may refuse coverage or issue it with exclusions or a higher rate.

The producer's duties

A producer recommending a replacement should:

1. Compare the two policies fairly, covering benefits, exclusions, limitations, premiums and waiting periods, not just the price.
2. Recommend replacement only when it benefits the client, not because it earns a new first-year commission.
3. Warn the client not to cancel the old policy until the new one has been issued and is in force. Dropping coverage too early can leave the insured with no protection at all.
4. Complete any required replacement forms and notices truthfully, and answer the replacement questions on the application honestly.

Two abuses are closely tied to replacement. Twisting is inducing someone to drop a policy with one insurer and buy from another through misrepresentation or an incomplete comparison. Churning is the same kind of unnecessary replacement done within the same insurer, usually to generate new commissions. Both are unfair trade practices.

Medicare supplement replacement

Replacement rules are strictest for Medicare supplement (Medigap) policies, because the buyers are older and often on fixed incomes. Under the standard rules states follow:

• The application must ask whether the applicant already has a Medicare supplement or other health coverage and whether the new policy will replace it.
• If it will, the applicant receives and signs a notice regarding replacement that explains the risks, and keeps a copy.
• The replacing policy must waive pre-existing condition, waiting, elimination and probationary periods for similar benefits, to the extent that time was already satisfied under the old policy.
• A person should never be sold a Medicare supplement policy that duplicates one they already have; the new policy replaces the old one, it does not sit on top of it.
• The buyer has a 30-day free look to return the new policy for a full refund.

The test for any replacement is simple: is the client clearly better off after the change than before it?