Replacement, Twisting and Churning

Replacement is defined as changes in existing coverage, usually with coverage from one insurer being "replaced" with coverage from another.  It is, however,  a practice that can lead to ethical lapses.  Agents should be aware that replacement of coverage can, in some cases, be inappropriate and therefore unethical.  That said, it can also be argued that failure to replace coverage that no longer meets the client's current needs may be just as unethical.   Because of the problems arising from unethical sales practices, state law imposes restrictions and additional duties on agents who seek to replace coverage.  

In Florida, replacement is defined as a purchase of new coverage accompanied by a substantial reduction in the benefits available under an existing policy, such as:

termination of the existing policy,
use of the non-forfeiture options such as reduced paid-up or extended term,
reissuance of a policy with reduced in cash values, or
borrowing more than 25% of an existing policy's cash value for purchase of new coverage.  

In these circumstances, the new coverage is said to replace the existing coverage -- and the agent has additional responsibilities.   Agents proposing a replacement policy, must provide the prospect with a "Notice to Applicant Regarding Replacement of Life Insurance".   This notice gives the policyholder the option to request a written comparison between the existing policy and the proposed coverage.   The agent must indicate on the application that the proposed policy will replace existing coverage -- thus notifying the proposed insurer that new coverage is a "replacement policy". If the prospect requests a written comparison of coverages, the replacing insurer will provide a comparison and notify the existing carrier of the proposed replacement.  Insurers must maintain a log of replacement business, which will be reviewed by state regulators as part of the insurer's periodic audit process.  

The law requires the agent to ask about existing coverage and note possible replacements on the application.  This is a minimal standard of conduct.  To be ethical, the agent must also provide a complete and accurate disclosure of the proposed replacement.  To do less, would be unethical.  A complete comparison with respect to a life insurance policy replacement requires that the consequences of any replacement be made clear to the policyowner.  For example, it must be explained that:

the new policy may impose a new suicide and contestability period
the policyholder's cost basis in the policy may be lost,
possible adverse tax consequences could result, and  
in the case annuities, new surrender charges may be imposed.

Twisting is the act of replacing insurance coverage of one insurer with that of another based on misrepresentations (coverage with Carrier A is replaced with coverage from Carrier B).  Churning is in effect "twisting" of policies by the existing insurer (coverage with Carrier A is replaced with coverage from Carrier A).  While replacement of existing coverage is a perfectly legitimate practice, inducing changes in coverage based on misrepresentation or deception is unethical and illegal.  

Please note: "churning" has another meaning in the securities industry, that of "trades of excessive size or frequency."  The primary purpose of such trades is to generating commissions for the registered representatives.  As there is no benefit for the client and is unethical, and prohibited by the National Association of Securities Dealers.  There are no established standards for determining when excessive trading is being done.  However, the agent needs to be guided by the client's interest with respect to his objectives and financial situation. ]

Proposed Legislation

Legislation has recently been adopted in certain states concerning life insurance replacement requirements that is expected to be endorsed by the National Association of Insurance Commissioners (NAIC) as model legislation for other states.  The legislation is a significant departure from existing replacement regulations that have been on the books for many years.  Pursuant to this new insurance replacement legislation the following steps must be taken for every life insurance policy replaced:

Insurers must have internal procedures in place to handle replacements and a company officer responsible for monitoring and enforcing them.

Applicants are given a 60-day period following the replacement sale during which they can change their mind and have their initial premium returned.  It is during this 60-day cooling-off period that replacing companies must implement additional disclosure requirements.

Agents are required to obtain a list of all of the applicant's existing life insurance and annuity contracts and must provide the applicant with a form that defines the scope of a life insurance replacement.  The form must be signed by both the agent and the applicant.

If replacement occurs or is likely to occur, the replacing agent must complete a statement disclosing specified information about the new policy and submit it with the life insurance application.  An insurer whose agent is replacing existing life insurance must reject any application received that isn't accompanied by the necessary disclosure forms.

·    Replacing insurers have increased disclosure responsibilities that they are expected to implement during the 60-day period, including -- supplying the replaced company with copies of the sales materials and proposals used in the new sale, and sending the disclosure statement to the insurer whose coverage is being replaced to complete the information concerning the policy being replaced.

The insurer whose life insurance is being replaced must forward the disclosure statement with both the new and existing policy information to its agent of record and to the new agent for delivery to the policyowner.

The applicant is given the completed disclosure statement containing the comparative data concerning the existing and replacement policies which should enable him or her to make an informed decision concerning the replacement.

A failure by a replacing agent to make a full and fair disclosure of all of the relevant information is a practice known as twisting.  It is illegal and unethical and, if the steps of this legislation are followed, it will be virtually impossible.  


Florida's current replacement rule requires agents to ask prospects if an existing policy's coverage is reduced as part of the application process.  If the agent knows -- or should have known -- that such reduction in an existing policy's value occurs when soliciting new coverage, the agent must complete a replacement form (OIR-B2-312 "Notice to Applicant Regarding Replacement of Life Insurance").  The applicant may request a comparison of the existing policy's benefits to the proposed coverage -- the replacing insurer must provide a comparison, if requested. (OIR-B2-313 "Comparative Information Form")

As mentioned earlier, twisting is the practice of replacement based on misrepresentations (coverage with Carrier A is replaced with coverage from Carrier B).  Churning is the practice of an insurer replacing existing coverage with a new policy based on misrepresentations.(coverage with Carrier A is replaced with coverage from Carrier A).   Both practices are illegal in Florida.