2.3 Maine Replacement Rules

What Counts as a Replacement

A replacement occurs when a new life policy or annuity is purchased and, as a result, existing coverage is acted on in any of these ways:

• Lapsed, surrendered, forfeited, or terminated
• Reduced in value or amount (face amount cut)
• Borrowed against — cash value or dividends used to pay the new premium
• Converted to reduced paid-up or extended-term insurance, or otherwise reissued with reduced benefits
• Amended to reduce benefits or the term of coverage

The trigger is the producer's or applicant's intent that the existing coverage be affected. The rules apply whether or not the same insurer issues both contracts (internal vs. external replacement).

Required Disclosures to the Applicant

The replacing producer must obtain a signed statement of whether a replacement is involved and, if so, deliver a Replacement Notice comparing old and new coverage.

The producer must leave the applicant a copy and retain signed copies for the state-required retention period (commonly several years), available to the Bureau on audit.

Notice to the Existing Insurer and the Conservation Period

Within the regulatory timeframe the replacing insurer must notify the existing insurer of the pending replacement, identifying:

• The policyholder's name
• The policy number(s) being replaced
• The new insurer
• The type of new coverage

This notice opens a conservation period (commonly about 20-30 days) during which the existing insurer may try to conserve the business:

• Send the policyholder a value statement or in-force illustration
• Explain the benefits being given up
• Offer alternatives to keep the existing coverage

The existing insurer may not make false or misleading statements about the new insurer or coerce the client; it must respect the policyholder's final decision.

Effect of Replacement on Policy Clocks

Because the replacement contract is a new policy, both protective clocks restart on it:

• A new 2-year incontestability period (Title 24-A §2507) — the new insurer can contest for two years.
• A new 2-year suicide exclusion (Title 24-A §2630).
• The applicant often receives an extended free look (commonly 30 days) on a replacement.

Worked Example

A client surrenders a 12-year-old policy (long past its contestable and suicide periods) to buy a new one. He has just re-exposed himself to a fresh 2-year contestability and suicide window, may owe surrender charges on the old contract, and may face a new surrender period on the replacement — exactly the harms the disclosure rules force the producer to spell out.

Prohibited Practice: Twisting

Twisting is the use of misrepresentation or incomplete comparisons about an existing policy to induce a policyholder to lapse, surrender, or replace it. The key element is deception.

Examples that constitute twisting:

• Falsely telling a client the existing policy is "worthless" or "obsolete."
• Misstating the existing policy's surrender or cash values.
• Concealing the surrender charges or new surrender period on the replacement.
• Exaggerating the guarantees or returns of the new contract.

Prohibited Practice: Churning

Churning is excessive or repeated replacement — often using the existing policy's own values — primarily to generate new commissions rather than to benefit the client. Churning frequently uses internal (same-insurer) replacements so it is less visible.

Red Flags for Churning

• Multiple replacements for the same client over a short span.
• Surrender charges repeatedly incurred and not disclosed.
• New surrender periods that restart each time.
• A producer's book showing an abnormally high replacement ratio.

Penalties

Both twisting and churning are unfair trade practices under Title 24-A. Consequences can include:

• License suspension or revocation by the Superintendent.
• Administrative fines per violation.
• Civil liability to harmed consumers (restitution, rescission).
• Criminal prosecution in egregious cases.

Producer Checklist Before Any Replacement

1. Identify — ask whether existing coverage will be affected; get the signed replacement question answered.
2. Compare the existing and proposed policies objectively, in writing.
3. Disclose surrender charges, new surrender periods, and the new 2-year contestable/suicide windows.
4. Determine best interest/suitability — is the client genuinely better off?
5. Notify the existing insurer through the replacing insurer.
6. Document and retain the signed notice and comparison for the required period.

Exam Tip: Distinguish the two prohibited practices by their core element: twisting hinges on misrepresentation, churning on commission-driven repetition. A single deceptive statement that flips one policy is twisting; a pattern of replacements to harvest commissions is churning. Rebating (giving value to induce a sale) and coercion are separate violations — don't confuse them with replacement misconduct.