2.3 Ohio Replacement Rules

What Counts as a Replacement

Replacement is any transaction where a new life policy or annuity is purchased and, as part of it, an existing policy is — or is likely to be — terminated, surrendered, lapsed, forfeited, converted to reduced paid-up, borrowed against beyond 25% of cash value, or otherwise reduced in value or benefit. Ohio governs this through Ohio Administrative Code (OAC) 3901-6-05, 'Replacement of Life Insurance and Annuities.' Its stated purpose is to ensure purchasers receive enough information to decide in their own best interest and to reduce misrepresentation.

A new contract is not automatically a replacement. Buying a second policy while keeping the first fully intact is simply additional coverage. The trigger is the intent or effect of ending or shrinking the existing coverage.

What Triggers the Rules

Producer and Applicant Duties at Application

At or before taking the application, the producer must:

1. Present a replacement notice and obtain the applicant's signature.
2. List every existing policy to be replaced, by insurer name, the insured/annuitant, and contract number.
3. Leave the applicant a signed copy and give a copy to the insurer.
4. Provide the appropriate Buyer's Guide and any required disclosures.

Exam Tip: The applicant signs the replacement notice before or at the time of application — not after delivery.

Notice, Refund, and Records (OAC 3901-6-05)

Three numbers carry most of the exam weight here:

The existing insurer, once notified, may try to conserve the business by explaining the value of the current coverage and offering alternatives — but it may not make misleading statements about the new insurer or coerce the policyholder.

Exam Tip: A replacement re-starts the clock — a new 2-year contestable period and a new suicide period begin on the replacement policy. That fresh contestability is often the single biggest hidden cost of replacing, and a required disclosure.

Prohibited Practices: Twisting vs. Churning

Both are unfair trade practices under Ohio law and grounds for license suspension or revocation, fines, and consumer restitution.

The practical difference: twisting involves a misrepresentation to induce the switch; churning is a pattern of unnecessary replacements (frequently within the same insurer's book).

Worked Scenario

A producer tells a client her 8-year-old whole life policy 'has no real value' and should be dropped for a new one — while quietly omitting that the new policy restarts the contestable period and adds a fresh surrender schedule. That is twisting: a material misrepresentation used to induce replacement. If that same producer repeatedly recycles the client into new policies each year to harvest first-year commissions, it becomes churning.

Producer Best Practices

• Compare existing vs. proposed coverage objectively (death benefit, premium, cash value, surrender charges, new contestability).
• Confirm the replacement genuinely serves the client's best interest.
• Document the basis for the recommendation and retain it 5 years.

Exam Tip: If an answer choice describes lying about an existing policy, choose twisting; if it describes a repeated commission-driven pattern, choose churning.

The Replacement Notice Itself

The replacement notice is a standardized form, not free text. It must, in plain language, tell the applicant to keep the existing coverage in force until the new policy is delivered and the free look has run, and it must compare the existing and proposed contracts. Required comparison items include:

Where Producers Get This Wrong

The most common compliance failures the exam tests are procedural, not malicious:

1. Getting the signature too late. The signed notice must exist at or before application, never at delivery.
2. Failing to list every replaced policy. Each existing contract must be named by insurer, insured, and number.
3. Letting the old policy lapse first. The applicant should keep the existing coverage active until the new one is delivered and the 30-day refund window passes — otherwise a declined or delayed new policy can leave the client uninsured.
4. Skipping the notice to the existing insurer. The 5-business-day notification is the replacing insurer's duty, and missing it is itself a violation.

Comparing the Two Annuity-Era Free Looks

Because Chapter 2 puts the disclosure rule and the replacement rule side by side, candidates routinely mix up the numbers. Lock these in:

Exam Tip: Conservation by the existing insurer is allowed, but it cannot include false statements about the replacing insurer, and it cannot be used to harass the policyholder into staying. The consumer's final decision controls.