2.3 Indiana Replacement Rules

What Counts as a Replacement

Indiana's replacement regulation, 760 IAC 1-16.1, governs both life insurance and annuities. A replacement occurs when a new policy is bought and, as part of the transaction, an existing policy is or will be:

• Lapsed, forfeited, surrendered, or terminated
• Converted to reduced paid-up insurance or continued as extended term
• Amended so as to reduce benefits or the term of coverage
• Reduced in value by loans, withdrawals, or use of dividend accumulations to pay the new premium
• Reissued with a reduction in cash value

If any of these is happening alongside the new sale, the producer is in a replacement and the full notice machinery applies.

Producer and Replacing-Insurer Duties

Trap: The general free look is often 10 days, but a replacement policy must give the owner a 20-day unconditional refund from delivery. Exam items frequently swap these two numbers.

The 'Important Notice' Comparison

The replacement notice must let the consumer compare old and new on the points that actually drive cost and value:

Conservation Right of the Existing Insurer

Once the existing insurer receives the replacement notice, it has a conservation right: it may contact the policyowner to explain the value of the in-force coverage and try to keep it. The rule requires the existing insurer to furnish an Essential Policy Information Summary (premiums, guaranteed cash values shown for 20 years or to age 65 whichever is sooner, death benefits, dividends, and any policy loan balance). The existing insurer may compete to retain the business but may not make false statements about the replacing insurer or the new product.

Prohibited Practices

Twisting

Twisting is misrepresenting or making incomplete comparisons about the terms or benefits of an existing policy to induce the owner to lapse or replace it. Examples:

• Falsely telling the owner the current policy is "worthless"
• Misstating surrender values or hiding the new surrender charges
• Exaggerating the new policy's benefits or growth

Churning

Churning is a form of twisting against the same client's own policies — using the values built up in existing coverage to fund new coverage repeatedly, generating commissions while harming the consumer. Red flags include short holding periods, repeat replacements across a producer's book, and undisclosed surrender charges.

Worked example: A producer surrenders a client's 4-year-old whole life policy — triggering a surrender charge the client wasn't shown — to fund a new policy that restarts both the surrender schedule and a fresh 2-year contestable period. This is churning; the producer faces discipline and civil liability.

Records and Best-Interest Overlap

Producers and insurers must retain replacement notices, signed comparison forms, and suitability documentation per IDOI's record-retention requirements (commonly five years). For annuity replacements, the best interest analysis from 2.2 stacks on top of these notices: the producer must separately document why surrendering the existing annuity benefits the consumer after accounting for surrender charges, a new surrender period, and lost guarantees.

Exam tip: On any replacement question, remember three numbers — 3 working days to notify the existing insurer, 20 days free look on the new policy, and a new 2-year contestable/suicide window.

Replacement vs. 1035 Exchange

Don't confuse the regulatory replacement process with the tax treatment of a swap. A Section 1035 exchange (Internal Revenue Code) lets an owner trade one life policy or annuity for a like contract without triggering current income tax on the gain. A 1035 exchange is still a replacement for IDOI purposes — all the notice, comparison, and best-interest duties apply. So a transaction can be tax-free under 1035 and fully subject to Indiana's replacement rule at the same time.

Allowed 1035 directions: life-to-life, life-to-annuity, and annuity-to-annuity. Annuity-to-life is NOT permitted — a frequently tested one-way restriction.

Penalty Framework and Producer Defenses

Indiana enforces replacement violations through the IDOI's administrative powers. Sanctions escalate with intent and harm:

A producer's best defense is the documentation file: signed replacement notices, the comparison the consumer received, the suitability/best-interest worksheet, and copies of all sales materials. If the file shows the consumer was given accurate, complete information and the recommendation matched the profile, an honest replacement is lawful even when the existing insurer's conservation effort fails.

Worked example: A client legitimately wants term-to-permanent conversion as a 1035 exchange. The producer reads the replacement notice, documents that the new permanent coverage matches the client's long-term estate-planning need, and notifies the old insurer within 3 working days. This is a fully compliant replacement — and tax-free under 1035 — not twisting.