2.3 Nevada Replacement Rules

A replacement occurs when a new life policy or annuity is purchased and, in connection with that sale, an existing policy is lapsed, surrendered, reduced, borrowed against, converted, or otherwise diminished. Because replacement can strip a consumer of accrued value and restart contestability, Nevada regulates it tightly.

What Counts as Replacement

A transaction is a replacement when, because of the new sale, an existing policy is or will be:

• Lapsed, forfeited, or surrendered, in whole or in part
• Reduced in value, benefit, or term, or its cash value borrowed
• Converted to reduced paid-up or continued as extended term
• Reissued or amended with a reduction in benefits or term

Required Notices and Disclosures

The producer must determine whether a replacement is involved (by asking the applicant) and, if so, provide a Notice Regarding Replacement with a meaningful comparison. The replacing insurer must notify the existing insurer so it can deliver in-force information, and both insurers must retain replacement records.

Exam Tip: Replacement is not illegal — it is heavily disclosed. What is illegal is misrepresenting the old policy (twisting) or needlessly churning policies for commissions.

Prohibited Practices

Twisting (NRS 686A.050)

Twisting is making a misleading written or oral statement — or an incomplete or fraudulent comparison — to induce a policyholder to lapse, forfeit, surrender, or replace insurance. Examples:

• Falsely claiming the existing policy is "worthless" or about to fail
• Misrepresenting the existing surrender value or dividends
• Hiding the new policy's surrender charges or higher attained-age premium
• Exaggerating the new policy's benefits

Churning

Churning is a pattern of unnecessary replacements — often funding a "new" policy with the cash value of the consumer's own existing policy — to generate repeat commissions. It ignores the client's interest and resets surrender-charge clocks each time. Churning is a species of unsuitable, self-dealing conduct that the DOI disciplines and that violates the best-interest annuity standard.

Consequences

Replacement Free Look

A replacement policy carries the same 10-day free look as other life/annuity contracts (LTC replacements get 30 days). The free look lets the consumer reverse a hasty replacement before the old coverage is irrevocably gone, which is why producers should advise clients not to surrender existing coverage until the new policy is delivered and reviewed.

Exam Tip: The single most-tested replacement trap is that a replacement restarts the 2-year contestable and suicide periods. A perfectly suitable-looking swap can leave a client newly contestable — a key reason replacement must be fully disclosed and documented.

Producer and Insurer Duties in a Replacement

Nevada's replacement rules assign concrete duties to both the producer and the replacing insurer, mirroring the NAIC Replacement Model:

The existing insurer's right to conserve the business — to contact its policyholder and present the value of keeping the old policy — is a built-in consumer safeguard. Producers should expect the existing carrier to reach out and must not interfere or disparage that contact.

Why Replacement Can Harm the Consumer

Replacement is regulated because it frequently disadvantages the consumer in non-obvious ways:

• New surrender-charge period — a fresh multi-year window during which the client loses money to exit.
• New contestable and suicide periods — the insurer can again contest for two years.
• Higher premium at attained age — life insurance costs more as the insured ages, so the "new" policy may cost more for the same benefit.
• Lost accrued values and riders — accumulated cash value, vesting, and grandfathered provisions may not carry over.
• New evidence of insurability — a health change since the original purchase could mean a worse rate class or a decline.

Annuity Replacement and 1035 Exchanges

Replacing one annuity with another — including a tax-deferred Section 1035 exchange — triggers the replacement rules and the best-interest annuity standard. The producer must document why the new contract is in the consumer's best interest despite any new surrender charges, and must compare guaranteed rates, riders, and fees side by side.

Exam Tip: A replacement is never justified solely by a higher commission. The producer must show a concrete consumer benefit and document it; failing that, the swap is unsuitable and may be churning.

The Producer's Replacement Duties in Nevada

When a sale will replace existing life insurance or an annuity, Nevada's replacement regulation requires the producer to (1) present and read a signed Notice Regarding Replacement comparing the old and new coverage, (2) submit a list of all policies being replaced with the application, and (3) leave the applicant all sales materials. The replacing insurer must notify the existing insurer, which then has a window to send the policyholder a conservation letter and an in-force illustration so the consumer can make an informed choice.

The Free-Look as a Replacement Safeguard

Replacement transactions trigger an extended free-look on the new policy, giving the consumer time to compare and rescind without penalty. The exam tests that the purpose of replacement rules is consumer protection against churning and twisting — the producer must document that the replacement is in the client's interest, not merely a commission event, and unsuitable replacement is an unfair trade practice subject to Division of Insurance penalties.