Key Takeaways
- New Mexico requires detailed written notice when replacing life insurance or annuities
- Producers must provide comparison of existing and proposed coverage
- Replacing insurer must maintain replacement records
- Twisting and churning are prohibited replacement practices
- New contestability and suicide periods begin with replacement policies
New Mexico Replacement Rules
Replacement occurs when a new life insurance policy or annuity is purchased with the intent to terminate, surrender, or reduce coverage under an existing policy. New Mexico has regulations to protect consumers from unsuitable replacements.
Definition of Replacement
A replacement occurs when a new policy is purchased and:
- An existing policy is lapsed, forfeited, or surrendered
- Policy values are reduced or borrowed
- Coverage is converted or reduced
- Policy is reissued with reduced values
- Policy is amended to reduce benefits
Required Disclosures
Replacement Notice
The producer must provide the applicant with a Replacement Notice that includes:
| Item | Requirement |
|---|---|
| Comparison | Side-by-side of existing and new policy |
| Surrender Values | Current and projected values |
| Death Benefits | Comparison of coverage amounts |
| Premium Costs | Cost difference over time |
| Surrender Charges | Charges for early termination |
| New Contestability | New 2-year period starts |
Prohibited Replacement Practices
Twisting (NMSA 59A-16-4)
Twisting is misrepresenting the terms of an existing policy to induce replacement:
| Prohibited Action | Example |
|---|---|
| False Statements | "Your current policy is worthless" |
| Misrepresenting Values | Understating cash value or benefits |
| Hiding Costs | Not disclosing surrender charges |
| False Comparisons | Misleading policy comparisons |
Churning
Churning is excessive replacement to generate commissions:
| Indicator | Description |
|---|---|
| Multiple Replacements | Same client replacing policies repeatedly |
| Pattern of Replacements | Producer's book shows excessive replacements |
| New Surrender Charges | Creating new surrender periods unnecessarily |
| Commission Motivation | Replacements benefit producer, not client |
Penalties for Prohibited Practices
| Violation | Penalty |
|---|---|
| First Offense | Fine up to $5,000, suspension possible |
| Repeat Offense | License revocation |
| Consumer Harm | Restitution plus penalties |
| Pattern of Abuse | Referral for criminal prosecution |
Replacement Record Retention
New Mexico requires retention of replacement documentation:
| Document | Retention Period |
|---|---|
| Replacement Notice | 5 years minimum |
| Policy Comparison | 5 years minimum |
| Customer Acknowledgment | 5 years minimum |
| Correspondence | 5 years minimum |
Exam Tip: Replacement violations are taken seriously in New Mexico. Producers must document every replacement thoroughly and keep records for at least 5 years.
What is the term for misrepresenting an existing policy to induce replacement in New Mexico?
What is the minimum grace period for life insurance premium payments in New Mexico?
How long must replacement records be retained in New Mexico?