2.3 Rhode Island Replacement Rules

What Counts as a Replacement

Replacement is any transaction in which a new life policy or annuity is purchased and, in connection with that sale, an existing policy or contract is (or will be):

• Lapsed, forfeited, surrendered, partially surrendered, or terminated;
• Converted to reduced paid-up insurance, continued as extended term, or otherwise reduced in value;
• Amended to reduce benefits or the term of coverage;
• Reissued with a reduction in cash value; or
• Used in a financed purchase — borrowing against or withdrawing values from the existing policy to pay premiums on the new one.

Rhode Island governs these transactions under 230-RICR-20-25-4, Life Insurance and Annuities Replacement (formerly Insurance Regulation 29). The purpose is to give consumers the facts to make an informed choice and to discourage unnecessary replacements that strip value.

Producer Duties at the Point of Sale

When replacement is involved, the producer must, not later than at the time of taking the application:

1. Ask whether the sale will involve a replacement and obtain a signed statement to that effect from the applicant.
2. Present and read aloud (unless the applicant declines) the Notice Regarding Replacement, signed by both the applicant and the producer, listing every policy being replaced with insurer name, contract number, and insured.
3. Leave the applicant copies of all sales materials used, including any illustrations.
4. Submit to the replacing insurer a copy of the replacement notice and the sales materials.

What the Replacement Notice Discloses

Insurer Duties and the Notification Timeline

The replacing insurer must maintain procedures to confirm that replacement requirements are met and must notify each existing (affected) insurer within 5 business days of receiving a completed application that flags a replacement. This 5-business-day window is the single most testable number in this section.

The existing insurer, on receiving that notice, may exercise a conservation effort — contacting its policyholder to provide an in-force ledger and explain the value of keeping the current policy. Conservation must be truthful; it cannot itself become a misleading sales pitch.

Record Retention

Both the replacing and existing insurers must keep replacement-related records for at least 5 years or until the conclusion of the next regular examination by the Department, whichever the rule specifies. Producers should retain their copies for the same period to survive a market-conduct exam.

Prohibited Practices: Twisting vs. Churning

Both are unfair methods of competition and unfair trade practices under R.I. Gen. Laws Chapter 27-29 and can lead to fines, restitution, and license action.

Advising a Consumer to Hide a Replacement

The rule expressly bars a producer from advising an applicant to answer "no" to a replacement question to prevent notice to the existing insurer. Doing so defeats the conservation right and is itself a violation.

Exam-Ready Summary List

• Regulation: 230-RICR-20-25-4 (formerly Reg 29)
• Notice Regarding Replacement: signed by applicant and producer at application
• Existing insurer notified within 5 business days
• Records kept ≥ 5 years / next exam
• Replacement restarts contestability and suicide (2 years each)
• Twisting = misleading comparison; Churning = same-insurer value cycling

Exam Tip: If a question contrasts company-to-company misrepresentation with same-company value recycling, the first is twisting and the second is churning.

When the Replacement Rule Does NOT Apply

Not every new sale triggers Regulation 29 paperwork. The rule generally excepts transactions where no existing coverage is disturbed, including:

• Credit life insurance and group life or annuity contracts;
• An application to the existing insurer that issued the policy when a contractual conversion or term-renewal is exercised;
• Nonconvertible term with no cash value that expires and is not renewed; and
• Proposed life policies funded by policy loans or values of the same contract under an established plan already in force.

Knowing the exceptions prevents the common error of assuming every sale needs a replacement notice. Internal replacements with the same insurer still require disclosure but follow a streamlined process.

Why a Replacement Can Hurt the Consumer

The regulation exists because replacing in-force coverage often costs the consumer value. A producer (and the exam) should be able to list the concrete harms:

Putting It Together: A Compliant Replacement

1. The producer asks about and documents existing coverage at application.
2. The signed Notice Regarding Replacement and all sales materials are given to the applicant and submitted to the replacing insurer.
3. The replacing insurer notifies each existing insurer within 5 business days.
4. The existing insurer may attempt truthful conservation.
5. All parties retain records ≥ 5 years / next exam.
6. The applicant still enjoys the policy's free look to reverse the decision.

Section 2.3 Exam Traps

• 5 business days is the insurer-notification deadline — not 5 calendar days, 10 days, or 30 days.
• A producer telling a client to answer "no" on the replacement question to avoid notice is an express violation.
• Twisting is misleading company-to-company comparison; churning recycles the same insurer's values.
• Replacement restarts both the 2-year contestable and 2-year suicide clocks.