Replacement of health insurance

What "replacement" means

A replacement happens when a client buys a new accident and health policy and, as part of the same transaction, lets an existing health policy lapse, cancels it, surrenders it, or reduces its benefits. The new policy takes the place of coverage the client already had. Adding a policy while keeping the old one in full force is not a replacement. Dropping or cutting back the old coverage because of the new sale is.

Replacement is not illegal, and sometimes it is the right advice. The new plan may be cheaper, broader, or better suited to the client's needs. But a replacement can quietly take things away from a client, so the law treats it as a sale that calls for extra care and disclosure.

What the client can lose

Before recommending a replacement, compare what the client gives up with what they gain:

• Pre-existing condition limits may start over. Where a policy type is still allowed to limit pre-existing conditions (for example, disability income, long-term care, many supplemental and limited-benefit plans), a new policy can exclude or delay coverage for conditions the old policy already covered.
• Waiting and probationary periods restart. Illness probationary periods, elimination periods and benefit waiting periods run again from the new policy's effective date.
• The contestable period restarts. The old policy may be past its two-year time limit on certain defenses. A new policy is contestable again, so a misstatement on the new application can be used to deny a claim or rescind coverage.
• Higher issue age, higher premium. The client is older now, and new underwriting may rate them up, exclude a condition, or decline them altogether.
• Valuable features can disappear. Guaranteed or non-cancellable renewability, riders, or benefits no longer sold may not be available in the replacement.

The producer's duties

A producer handling a possible replacement should:

1. Ask. Find out whether the applicant has existing accident and health coverage and whether the new policy is intended to replace it. The application asks this question, and the answer must be truthful.
2. Give the replacement notice. When a replacement is involved, the applicant receives a written notice regarding replacement that explains the risks above and urges the client to compare carefully and to check with the current insurer. It is typically signed by the applicant (and the producer), a copy is left with the applicant, and a copy is kept by the insurer.
3. Recommend only what is in the client's interest. The replacement should leave the client better off, not just generate a new commission.
4. Never cancel the old policy first. Tell the client to keep the existing coverage until the new policy has been approved, issued and is in force, and they have reviewed it during the free-look period. Otherwise a declined application leaves them uninsured.

Persuading a client to drop a policy through misrepresentation or an incomplete comparison is twisting, an unfair trade practice. Repeatedly replacing a client's coverage mainly to earn new commissions is churning.

Medicare supplement and long-term care

Replacement rules are strictest for seniors' coverage. In a Medicare supplement replacement, the applicant must confirm they do not intend to keep both policies, receives a replacement notice, and gets a 30-day free look. The new Medicare supplement policy must also give credit for pre-existing condition and waiting periods already satisfied under the old one. Long-term care replacements carry a similar notice and 30-day free look.

Regulators set minimum standards for how health insurance is sold, including the elimination of deceptive sales practices, and replacement rules are one of the main ways those standards are enforced.