2.3 Montana Replacement Rules

What Counts as a Replacement

A replacement is a transaction in which a new life policy or annuity is purchased and, as part of the transaction, an existing policy is affected. Montana's rule (aligned with the NAIC replacement model) treats the following as replacement:

• The existing policy is lapsed, surrendered, forfeited, or terminated
• Values are reduced, withdrawn, or borrowed to fund the new policy
• The existing policy is converted to reduced paid-up or extended term
• The existing policy is reissued, amended, or re-dated with reduced benefits

A replacement can be internal (same insurer) or external (different insurer); the disclosure duties apply to both, though internal replacements may use a streamlined notice.

Required Disclosures

The producer must give the applicant a signed Replacement Notice at or before application and obtain the applicant's signature, then submit copies to the replacing insurer. The notice and accompanying comparison must show:

Why Replacement Can Hurt the Consumer

Replacement is not automatically wrong, but the exam wants you to know the consumer risks that drive the disclosure rules:

• New 2-year incontestability and suicide periods restart, removing protections the old policy had already earned.
• The insured is older and possibly less healthy, so the new premium may be higher.
• The new policy imposes a fresh surrender-charge schedule, while the old one may already be past it.
• Acquisition costs (commissions, fees) are paid again, eroding early cash value.

Producer and Insurer Duties at Application

The replacement rules assign specific steps that show up as exam scenarios. The producer must, at the time of application: present and read the Replacement Notice, list every existing policy that will be replaced (with insurer name and policy number), leave the applicant copies of all proposals and illustrations, and submit a signed statement to the replacing insurer indicating whether replacement is involved. The applicant must also sign a statement on the application about whether existing coverage will be replaced.

The replacing insurer must then notify the existing insurer that a replacement is occurring, maintain the documentation, and ensure its producers follow the rules. The existing (conserving) insurer may respond to the policyholder but must do so factually — it cannot use scare tactics to keep the business, which would itself be an unfair practice.

Extended Free Look and Notice Timing

Because replacement carries these risks, Montana extends the consumer's protections:

• The free-look window is extended for a replacement policy or annuity (commonly 20-30 days) so the consumer can compare before the old coverage is gone.
• The existing insurer is notified and may send the policyholder a conservation communication explaining the value of keeping the current policy.
• A producer must leave the applicant with a copy of all sales materials and illustrations used.

Prohibited Practices

Twisting

Twisting is using misrepresentation or incomplete comparison to induce a policyholder to replace existing coverage. Examples the exam uses:

• Falsely telling a client an existing policy is "worthless" or "about to be canceled"
• Misstating cash values or hiding surrender charges
• Exaggerating the new policy's benefits or understating its cost

Churning

Churning is a pattern of unnecessary replacements — often using the values of the customer's own existing policy — primarily to generate new commissions rather than to benefit the client. A book of business showing repeated internal replacements is the classic red flag.

Trap: the difference between twisting and churning is the means. Twisting always involves a misrepresentation; churning is about the pattern/volume of replacements regardless of whether any single statement was false.

Records Retention and Producer Duties

Both the producer and the replacing insurer must retain replacement records (the signed notice, comparisons, and illustrations) so the CSI can verify compliance during a market-conduct examination. The replacing insurer must also be able to show it sent any required notice to the existing insurer. Missing or falsified replacement documentation is itself grounds for disciplinary action, separate from any underlying twisting or churning.

Penalties and Producer Accountability

Violations of the replacement and unfair-practice rules expose the producer to administrative fines, license suspension or revocation, and restitution ordered by the CSI, and can be referred for criminal prosecution where fraud is involved. The exam frequently tests that good faith is not a defense to a documentation failure: even an honest producer who skips the Replacement Notice or fails to keep records has violated the rule.

Distinguish this from rebating (giving the client something of value not stated in the policy to induce a sale) and defamation of a competitor, which are separate unfair trade practices, not replacement violations.