2.3 Kentucky Replacement Rules

What Counts as a Replacement

Under 806 KAR 12:080 and the minimum standards of KRS 304.12-030, a replacement occurs when a new life policy or annuity is purchased and, as part of the transaction, an existing contract is:

• Lapsed, surrendered, forfeited, or terminated;
• Converted to reduced paid-up or continued as extended term;
• Borrowed against for more than 25% of loan value to pay the new premium;
• Reissued, amended, or reduced in benefits.

The defining element is intent to discontinue or diminish the old coverage. An internal exchange within the same insurer may follow a streamlined process, while an external replacement to a new insurer triggers the full notice-and-notification machinery.

Producer and Applicant Duties

When replacement is involved, the producer must:

Notice to the Existing Insurer

The replacing insurer must notify the existing insurer of the pending replacement within the regulatory timeframe (generally within 5 business days of receiving the application). The existing insurer then has a conservation opportunity — typically a 20-day window to contact the policyholder and present information to retain the business.

Extended Free Look

A replacement extends the free look. The applicant keeps the standard 10 days plus an additional 20 days, for a 30-day unconditional right to return the new policy for a full refund — deliberately long enough to compare against the surrendered contract.

Trap: A replacement restarts both the 2-year incontestability and 2-year suicide periods on the new policy. The consumer loses the "seasoning" already earned on the old contract — a key reason replacements often hurt the buyer.

Distinguish internal from external replacement, because the procedural burden differs. An internal replacement (new policy with the same insurer that issued the old one) may use an abbreviated process since one company controls both contracts. An external replacement, where a different company issues the new policy, triggers the full sequence: signed replacement notice, identification of every policy being replaced, submission of the form with the application, and formal notification of the existing insurer so it can exercise conservation.

Producers must also answer truthfully on the application whether replacement is involved — concealing a replacement to avoid the disclosure steps is itself a violation, even if the underlying sale would have been suitable.

Required Comparison Disclosures

The replacement notice must let the consumer weigh old against new on the dimensions that actually drive value:

Prohibited Practices

Twisting

Twisting is using misrepresentation or incomplete comparison to induce a policyholder to replace existing coverage. It is a form of misrepresentation under Kentucky's Unfair Trade Practices provisions.

• Falsely calling an existing policy "worthless" or "a bad deal."
• Hiding the new surrender charges or restarted contestable period.
• Overstating the new policy's projected (non-guaranteed) returns.

Churning

Churning is replacement within the same insurer or book of business, often funded by the old policy's values, primarily to generate new commissions rather than to benefit the client.

• Repeated replacements over short holding periods.
• A pattern across a producer's clients.
• Surrender charges and lost values that exceed any benefit gained.

Penalties for twisting and churning include license suspension or revocation, administrative fines, restitution to harmed consumers, and — in egregious cases — criminal referral. The DOI may also order corrective action against the insurer.

Records Retention

Insurers and producers must retain replacement documentation — the signed notice, comparison, and any sales material — for the period set by 806 KAR 12:080 (commonly the longer of 5 years or until the next regulatory exam). Records must be producible on DOI demand.

Worked Scenario

A producer convinces a client to drop a 9-year-old whole life policy (past its contestable and suicide periods, with built-up cash value) for a new policy with a higher first-year commission. The producer omits that surrender charges apply and that a fresh 2-year contestable period starts. This is twisting if based on misrepresentation, and churning if it fits a commission-driven pattern — exposing the producer to license revocation.

Exam Tip: Distinguish the two: twisting = misrepresentation to replace (any insurer); churning = replacement within the same insurer/book to harvest commissions.