Which transaction triggers North Dakota's replacement rules?

A 1035 exchange of one annuity for another. A 1035 exchange surrenders an existing annuity to fund a new one, so it is a replacement requiring the full notice process. Merely paying a premium, adding a rider, or reinstating the same contract does not trigger replacement rules.

Misrepresenting the dividends or surrender value of an existing policy to persuade a client to replace it is best described as:

Twisting. Twisting is the use of misrepresentation or a misleading comparison to induce replacement of existing coverage. Churning is a commission-driven pattern of replacements, rebating is giving value outside the contract, and coercion involves force.

What consumer consequence is created when an old, fully matured policy is replaced with a new one in North Dakota?

A fresh 2-year contestability period and 1-year suicide period begin on the new policy. Replacement restarts the new policy's two-year contestability clock and one-year suicide clock (NDCC 26.1-33-37), reviving protections that had already expired on the old policy, and typically imposes new surrender charges at the insured's older age.

After a replacement transaction, what role does the EXISTING insurer have under North Dakota's rules?

It is notified and gets a window (about 20 days) to attempt conservation. The replacing insurer must notify the existing insurer, which then receives a conservation window of roughly 20 days to contact the policyholder and try to retain the business with a comparison letter.

North Dakota Replacement Rules | Free L&H Insurance Guide 2026

Key Takeaways

Replacement occurs when a new life or annuity contract is purchased and an existing one is lapsed, surrendered, borrowed against, or reduced as part of the transaction.
The replacing producer must give a signed replacement notice listing every policy being replaced and submit copies of all sales material.
The existing insurer generally must be notified and gets a 20-day window to communicate with the policyholder and try to conserve the business.
Twisting (misrepresentation to induce replacement) and churning (excessive replacement for commissions) are prohibited and carry penalties.
A replacement restarts the new policy's two-year contestability clock and one-year North Dakota suicide clock and may impose fresh surrender charges.

What Counts as a Replacement

A replacement is a transaction in which a new life insurance policy or annuity is purchased and the producer knows, or should know, that an existing life policy or annuity will be (as part of the deal):

Lapsed, forfeited, surrendered, or otherwise terminated;
Reissued with reduced cash value or benefits;
Converted to reduced paid-up insurance, continued as extended term, or otherwise reduced;
Amended to reduce benefits or the term of coverage;
Used as a source of financing — e.g., a policy loan or withdrawal of more than 25% of the loan value to pay premiums on the new contract.

If any of these will happen, the replacement rules are triggered even if the consumer initiated the idea. A common trap: a 1035 tax-free exchange of one annuity for another is a replacement and requires the full notice process.

Producer and Insurer Duties

Party	Required Action
Applicant	Answers a replacement question on the application
Replacing producer	Presents and reads the replacement notice; obtains the applicant's and producer's signatures; lists every policy/contract to be replaced (insurer, contract number, insured)
Replacing producer	Leaves the applicant a copy of the notice and any sales proposals/Buyer's Guide
Replacing insurer	Notifies the existing insurer in writing, usually within 5 working days, and retains records for at least 5 years
Existing insurer	Receives notice; gets roughly a 20-day window to send the policyholder a comparison/conservation letter

Free-look interaction: Because the new policy is a replacement, North Dakota still gives the buyer the standard 20-day free look to undo the transaction. The conservation window for the existing insurer is what gives the consumer a fully informed chance to keep the old coverage.

Why Replacement Is Risky for the Consumer

Producers must disclose that replacement is rarely a free swap:

The new policy starts a fresh 2-year contestability period and a fresh 1-year suicide period — protections that had already expired on the old policy are reset to zero.
New surrender charges and acquisition costs apply; cash value may be lost.
The insured is older, so the new premium is typically higher for the same face amount, and an interim health change could make the insured uninsurable for the new contract.
Existing policy loans, riders, or favorable guaranteed rates may not carry over.

Prohibited Practices

North Dakota's trade-practice statutes (Title 26.1) outlaw the abuses most associated with replacement. Know the precise definitions — the exam separates these from each other and from unrelated terms like rebating and coercion.

Twisting

Twisting is the use of misrepresentation or incomplete/fraudulent comparison of policies to induce a policyholder to lapse, surrender, or replace existing coverage to the consumer's detriment. Examples:

Telling a client the existing policy is "worthless" or "about to be cancelled" when it is not;
Misstating the surrender value, dividends, or guarantees of the old policy;
Hiding the new surrender-charge schedule or the restarted contestability period;
Exaggerating the returns or guarantees of the new product.

Churning

Churning is a pattern of unnecessary replacements — often using the cash value of the consumer's own existing policy with the same insurer — primarily to generate new commissions rather than to benefit the client. Indicators: repeated replacements across a producer's book, replacing recently issued policies, and new surrender periods with no offsetting consumer benefit.

Practice	Core element	Key distinction
Twisting	Misrepresentation to induce replacement	Focus is the deception used
Churning	Excessive replacement for commissions	Focus is the pattern/intent to earn commissions
Rebating	Giving value not in the contract to induce a sale	Not necessarily a replacement at all
Coercion	Force/intimidation to influence a transaction	Often involves an antitrust/lending tie-in

Records and Penalties

The replacing insurer must maintain replacement records — the signed notice, sales material, and the suitability/best-interest documentation (for annuities) — and produce them for market-conduct examination by the North Dakota Insurance Department. Records are generally kept at least five years.

Enforcement consequences for twisting, churning, or failing to follow the replacement procedure include:

Administrative fines per violation;
Suspension or revocation of the producer's license;
Restitution to harmed consumers;
Referral for criminal prosecution where fraud is involved.

Scenario Walkthrough

A producer convinces a 60-year-old to surrender a 12-year-old whole life policy (long past its contestable and suicide periods) and 1035-exchange the cash into a new universal life policy, telling her "the old one no longer pays dividends." The dividends statement is false.

Replacement triggered: yes — the existing policy is surrendered and a 1035 exchange funds the new one, so the full notice, signatures, existing-insurer notification, and Buyer's Guide are required.
Violation: the false dividend claim is twisting.
Consumer harm: the new policy restarts the 2-year contestable and 1-year suicide clocks, imposes fresh surrender charges, and is priced at the older age.
Result: the producer faces fines, possible license action, and restitution; the consumer retains her 20-day free look to reverse the new contract.

North Dakota Life & Health Insurance

2.3 North Dakota Replacement Rules