2.3 Kansas Replacement Rules

What Counts as a Replacement

Under K.A.R. 40-2-12, a replacement occurs when a new life policy or annuity is bought and, as part of the transaction, an existing policy is terminated or weakened. Replacement is not limited to a full surrender - reducing values counts too.

A replacement exists when, because of the new sale, an existing policy is:

• Lapsed, forfeited, surrendered, or otherwise terminated
• Converted to reduced paid-up, continued as extended term, or otherwise reduced in value
• Amended to reduce benefits or the term of coverage
• Reissued with a reduced cash value, face amount, or period of coverage
• Subjected to borrowing of more than 25% of the loan value to pay the new premium

Worked example: A producer arranges for a client to take a $9,000 policy loan against $30,000 of loan value (30%) to fund a new policy's first premium. Because that exceeds the 25% threshold, the transaction is a replacement and the full K.A.R. 40-2-12 notice machinery applies even though the old policy stays technically in force.

Required Disclosures and Notices

The Replacement Notice to the Applicant

The producer must give the applicant a signed replacement notice that compares old and new coverage:

The applicant and producer both sign, and the producer leaves a copy with the buyer.

Notice to the Existing Insurer

The replacing insurer must notify the existing insurer of the pending replacement, providing the policyholder's name, the policy number being replaced, the new insurer's name, and the type of new coverage. This notice is what starts the conservation effort.

Conservation Period

Once notified, the existing insurer gets a conservation window (commonly about 20 days) to contact the policyholder and try to retain the business. During conservation the existing insurer may:

• Explain the value and guarantees of the in-force policy
• Offer alternatives such as a loan, reduced paid-up, or rider rather than surrender
• Provide accurate in-force illustrations

It may not make false statements about the new insurer or the proposed policy, and it must respect the policyholder's final decision.

Prohibited Practices

Twisting

Twisting is misrepresenting the terms, values, or benefits of an existing policy to induce a replacement. It is a single deceptive act aimed at one consumer.

Examples:

• Falsely telling a client the old policy is "worthless" or "about to lapse"
• Misstating the existing policy's surrender value or dividends
• Hiding the surrender charges or new contestable period on the replacement
• Exaggerating the new policy's projected returns

Churning

Churning is the repeated, commission-driven replacement of policies - often using one policy's own values to fund the next - with no benefit to the client.

Penalties for twisting and churning include license suspension or revocation, administrative fines, restitution/civil liability to harmed consumers, and criminal prosecution in serious cases.

Records Retention and Producer Duties

Insurers and producers must retain replacement records (replacement notices, comparisons, signed acknowledgments) and make them available to the Kansas Insurance Department - commonly for at least 3 to 5 years. Before recommending any replacement, the producer must:

1. Compare existing and proposed coverage objectively
2. Determine the replacement is in the client's best interest
3. Disclose all costs, including surrender charges and the new contestable period
4. Document the basis for the recommendation
5. Confirm the client understands the consequences

Replacement vs. Internal Transactions

Not every change is a regulated replacement, and the exam tests the boundary. The following are generally not replacements requiring K.A.R. 40-2-12 notices: exercising a contractual conversion privilege on a term policy with the same insurer, using existing values to buy a paid-up addition, or a loan that stays at or below the 25% threshold. By contrast, a 1035 exchange that surrenders one contract for another, or funding a new policy by borrowing more than 25% of loan value, is a replacement.

A Compliant Replacement, Step by Step

Worked example: A client wants to replace a $100,000 whole-life policy issued 12 years ago with a new universal-life contract. A compliant producer: (1) collects suitability information; (2) prepares the side-by-side comparison of cash values, premiums, and death benefits; (3) hands the client the signed replacement notice disclosing the surrender charge on the old contract and the new 2-year contestable and suicide windows; (4) submits the application flagged as a replacement so the insurer notifies the existing carrier; and (5) retains every document for the state retention period.

Skipping the notice - even if the new policy is genuinely better - is itself a violation.

Penalties and Enforcement Snapshot

Exam Tip: The most-missed replacement fact is that a new 2-year incontestability and 2-year suicide period restarts - so a replacement can leave a long-insured client newly contestable.