2.3 North Dakota Replacement Rules

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

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:

1. The new policy starts a fresh 2-year contestability period and a fresh 2-year suicide exclusion — protections that had already expired on the old policy are reset to zero.
2. New surrender charges and acquisition costs apply; cash value may be lost.
3. 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.
4. 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.

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 a 2-year contestable and suicide clock, 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.