New York life insurance and annuity replacement (Ins. Law 2123; Reg 60)

Why New York regulates replacement

Replacing an existing life insurance policy or annuity with a new one can help a buyer, but it often hurts them. They may lose cash value to surrender charges, start a new contestable and suicide period, pay higher premiums because they are older, and give up benefits they cannot get back. New York handles this risk with two layers of rules.

• Insurance Law § 2123 is the statute. It forbids misrepresenting a policy's terms, benefits or dividends. It forbids an incomplete comparison of policies made to induce someone to lapse, forfeit or surrender coverage, which is the practice exam writers call twisting. It also requires every replacement of an individual life policy or individual annuity to follow standards the Superintendent sets by regulation.
• Regulation 60 (11 NYCRR 51) is that regulation. It defines replacement, sets the forms and the order they are used in, and assigns duties to the producer, the replacing insurer and the existing insurer.

What counts as a replacement

A replacement is broader than cancelling one policy and buying another. It occurs when, as part of buying a new life policy or annuity, existing coverage has been or is likely to be lapsed, surrendered, forfeited, assigned, terminated, or changed into paid-up insurance. It also occurs when existing coverage is loaned against or withdrawn from, reduced in value by using its cash values, cut in amount or duration, or kept in force with premiums stopped or reduced. It applies whether the new policy comes from the same insurer or a different one, so an internal exchange can be a replacement too.

The forms and who handles them

1. At application, before any replacement question, the applicant sees the Definition of Replacement. In some cases the insurer uses the shorter Important Replacement Notice in its place. The application then asks whether the new coverage is intended to replace any existing insurance or annuity, in whole or in part.
2. If a replacement is involved, the applicant also gets the Important Notice Regarding Replacement, and the producer lists every policy or contract to be replaced. Both the Definition of Replacement and the Important Notice should be signed on the date the applicant completes or is presented with the application.
3. A Disclosure Statement compares the existing coverage with the proposed coverage. If an initial statement was given before issue and the final terms differ, the insurer prepares a revised Disclosure Statement, which must say "revised" on its first page.
4. The replacing insurer reviews the package and notifies the existing insurer of the proposed replacement, which under Regulation 60 must happen within 10 days. It must also give the owner an extended free-look period, 60 days for a replacement, during which the new policy can be returned for a refund.
5. The existing insurer is told about the replacement so it can contact the owner. The notice itself suggests the owner call the company or agent who sold the old policy before deciding.

Exam tip: the producer's job is disclosure and documentation at the point of sale. The insurer's job is review, notification and the extended free look.

Insurer procedures and filings

Every life insurer and fraternal society must set up written procedures for following Regulation 60, file them with the Superintendent, and file any change within 30 days. Most procedures are filed for procedural review and can be used once filed. Two kinds of filing need prior approval:

• Alternate procedures, used when no agent is involved, so no Disclosure Statement is required, or when an agent is involved only in a limited way after the application stage, in which case a Disclosure Statement is required.
• Changed forms. The forms must be in at least 12-point type. Any change other than adding the company's name and a form number needs approval.

Completed replacement documents are kept under New York's record-retention rule, Regulation 152.