2.3 Missouri Replacement Rules

What Counts as a Replacement

A replacement is a transaction in which a new life policy or annuity is purchased and, as a consequence, an existing Missouri policy is:

• Lapsed, surrendered, forfeited, or terminated;
• Converted to reduced paid-up insurance, continued as extended term, or otherwise reduced in value;
• Amended to reduce benefits or the term of coverage;
• Borrowed against for more than 25% of the loan value to pay the new premium; or
• Reissued with a reduction in cash value.

The key trigger is the intent and effect on existing coverage — a producer cannot avoid the rules by calling it "new business" if an in-force policy is being unwound to fund it.

By contrast, certain transactions are exempt from replacement rules: group life and group annuities, an in-force policy whose application predates the replacement, and contracts where the existing insurer and new insurer are the same and the transaction is a conversion using a nonforfeiture provision. Knowing what is not a replacement is as testable as the definition itself.

Worked example: A client borrows 40% of the cash value from her existing policy to pay the first premium on a new policy with a different carrier. Because the loan exceeds the 25% threshold and funds new coverage, the transaction is treated as a replacement and triggers full notice and comparison duties — even though the old policy technically stays in force.

Producer and Insurer Duties

When a sale is or may be a replacement, the producer must:

The replacing insurer must then:

• Notify each existing insurer in writing that a replacement is or may be occurring, identifying the policyholder and the policy being replaced;
• Maintain replacement records;
• Provide the existing insurer a copy of any proposal or comparison used.

Trap: The notice and comparison must be delivered at the time of application, not at delivery. Waiting until policy delivery violates the rule.

Conservation Period

Once notified, the existing insurer has a conservation opportunity: it may contact the policyowner to explain the value of keeping current coverage and offer alternatives (e.g., a paid-up addition or a reduced face). The existing insurer's communications must be truthful — it may not make false or misleading statements about the new insurer or coverage. The owner is free to proceed if, after that information, replacement still makes sense.

Consequences the Consumer Must Understand

A replacement policy is brand-new business, so the consumer loses ground that the old policy had already earned:

Prohibited Practices

Twisting is misrepresenting or making incomplete comparisons of a policy's terms to induce a policyowner to replace it. Examples: calling an in-force policy "worthless," hiding the new policy's surrender charges, or exaggerating the new policy's returns.

Churning is the excessive replacement of policies (often using the insured's own cash values) primarily to generate commissions, frequently with the same insurer. Red flags: repeated replacements over short holding periods, undisclosed surrender charges, and a pattern across a producer's book.

Both are unfair trade practices under RSMo Chapter 375. Penalties can include:

• License suspension or revocation;
• Administrative fines (and per-violation penalties);
• Restitution / civil liability to harmed consumers;
• Criminal prosecution in egregious cases.

Recordkeeping

Replacing insurers and producers must retain replacement documentation (notices, comparisons, signed acknowledgments) so the DCI can audit for churning patterns and consumer harm.

Producer Best-Practice Checklist

1. Determine objectively whether the transaction is a replacement.
2. Deliver and obtain signatures on the replacement notice at application.
3. Provide an accurate side-by-side comparison.
4. Document why the replacement is in the consumer's best interest.
5. Confirm the consumer understands the new contestable, suicide, and surrender terms.

Trap: Replacement is not inherently illegal. A properly documented replacement that genuinely benefits the consumer (e.g., moving from an obsolete, high-cost policy to a cheaper one with better features) is permitted. The violations are deceptive replacement (twisting) and excessive replacement for commissions (churning). The exam often offers "all replacements are prohibited" as a wrong answer — recognize it as a distractor.

Finally, distinguish replacement violations from other unfair trade practices that appear nearby on the exam: rebating (giving the buyer part of the commission or anything of value not in the contract as an inducement), coercion (using physical or economic force to influence a sale), and defamation (making false statements about another insurer's financial condition). Twisting and churning specifically attach to the replacement context, while these others can occur in any transaction.