2.3 Maryland Replacement Rules

What Counts as a Replacement

A replacement occurs whenever a new life or annuity contract is purchased and the producer knows (or should know) that an existing policy will be affected. Under COMAR replacement rules, the existing policy is:

• Lapsed, surrendered, or forfeited
• Reduced in value through loan or withdrawal
• Converted or amended to reduce benefits or term
• Reissued with reduced cash value or face amount
• Pledged or used in financed-purchase arrangements

The key trigger is intent and effect: even partial reductions count. A 1035 exchange of one annuity for another is a replacement even though it is tax-free.

Required Replacement Disclosures

When a transaction is a replacement, the producer must, at or before application:

1. Present and read the Notice Regarding Replacement, signed by both applicant and producer.
2. Provide a list of all existing policies to be replaced with policy numbers and insurer names.
3. Leave the applicant copies of all sales materials used.

Trap: The new policy starts a fresh 2-year incontestability and 2-year suicide period. A consumer who has held a policy for 8 years (long past contestability) loses that protection by replacing it — a classic reason replacement can hurt the buyer.

Notice to the Existing Insurer and Conservation

The replacing insurer must send written notice to the existing insurer identifying the policyholder, the policy number, and the new coverage. This notice opens the existing insurer's conservation period (commonly 20 days), during which it may contact the owner to:

• Explain the value of the existing coverage
• Offer alternatives to preserve the policy (e.g., reduced paid-up)
• Provide an in-force illustration

The existing insurer may not make false statements about the new insurer or the producer, and must ultimately honor the owner's decision.

Prohibited Practices: Twisting and Churning

Twisting is misrepresenting or making incomplete comparisons about a policy's terms, benefits, or values to induce a policyholder to lapse, forfeit, surrender, or replace existing coverage. It is an unfair trade practice under the Insurance Article.

Examples of twisting:

• Falsely calling an existing policy "worthless" or "outdated"
• Misstating the surrender value or dividends of the old policy
• Hiding the surrender charges or restarting clocks on the new policy
• Exaggerating the guaranteed returns of the replacement

Churning is the repeated, unnecessary replacement of a client's policies — often using the cash value of an existing policy to fund a new one — primarily to generate commissions.

Trap: Twisting and churning are easy to mix up. Twisting = lying/misleading to cause a replacement. Churning = the volume/pattern of replacements. Rebating is unrelated — it is giving the buyer something of value (cash, gift) outside the policy.

Recordkeeping and Producer Duties

Maryland requires producers and insurers to retain replacement records (the signed notice, comparison, and sales materials) and produce them for MIA market-conduct exams. Failing to keep these is itself a violation.

Before recommending any replacement, a producer should:

1. Compare existing and proposed coverage objectively, in writing.
2. Determine the replacement is in the client's best interest (suitability applies).
3. Disclose all costs, surrender charges, and the restarting contestability/suicide clocks.
4. Document the basis for the recommendation.
5. Confirm the client understands what is being given up.

Worked example: A producer convinces a client to surrender a 9-year-old whole life policy (well past contestability) to buy a new one, telling her the old policy "earns nothing." The statement is false, the new contestability period restarts, and surrender charges apply — this is twisting, and if part of a pattern, churning as well.

When Replacement Rules Do and Do Not Apply

Not every new sale is a regulated replacement. Knowing the carve-outs prevents both over- and under-disclosure.

When rules apply, the producer's failure to deliver the Notice Regarding Replacement is itself a violation even if the replacement was otherwise suitable. Conversely, falsely treating a non-replacement as a replacement is not penalized but creates needless paperwork.

Penalties, Restitution, and Producer Accountability

Maryland treats improper replacement seriously because it directly harms consumers who lose accrued contestability protection, pay new surrender charges, and may face new underwriting.

The Insurance Commissioner may:

• Impose administrative fines per violation and per affected consumer.
• Suspend or revoke the producer's license and the appointing insurer's authority.
• Order restitution to harmed policyholders.
• Refer egregious fraud for criminal prosecution.

Insurers bear vicarious responsibility: they must maintain a replacement-monitoring system, audit producers with high replacement rates, and report patterns. A carrier that ignores a churning pattern can be sanctioned alongside the producer.

Worked example: A producer replaces the same client's annuity three times in 30 months, each time restarting a surrender schedule and earning a new commission while the client pays escalating surrender charges. The MIA can fine the producer, revoke the license, order restitution of the surrender charges, and discipline the insurer for failing to flag the pattern.

Trap: Suitability and replacement duties are separate. A replacement can be properly disclosed (forms signed, comparison given) yet still be unsuitable — and an unsuitable replacement is a violation even with perfect paperwork.