2.3 Virginia Replacement Rules

What Counts as a Replacement

Virginia's Rules Governing Life Insurance and Annuity Replacement (14VAC5-30) define a replacement as any transaction in which a new life policy or annuity is purchased and, as a result, existing coverage is:

• Lapsed, forfeited, surrendered, partially surrendered, or terminated;
• Converted to reduced paid-up, 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
• Subjected to borrowing of more than 25% of the loan value to pay the new premium.

Replacements are not illegal, but because they expose consumers to new surrender charges, new contestability, and possible coverage gaps, they are tightly controlled.

Producer Duties at Application

When replacement is involved, the producer must:

Replacing Insurer's Duties — The 5-Business-Day Rule

The replacing insurer must verify the producer's compliance and notify each existing insurer within 5 business days of receiving the completed application identifying a replacement. On request from an existing insurer, it must also mail a policy summary or illustration within 5 business days. The replacing insurer must keep replacement records, indexed by the existing insurer, for at least 5 years.

Exam Tip: The recurring number here is 5 business days — both for notifying the existing insurer and for furnishing summaries on request. Do not confuse it with the 31-day grace period or the 3-year reinstatement window from Section 2.1.

Existing Insurer's Conservation Right

The existing insurer receives the replacement notice and may attempt conservation — contacting the policyholder to explain the value of the in-force policy and offer alternatives (such as a loan or premium adjustment). It must send a notice that releasing values may affect guaranteed elements, face amount, or surrender value. The existing insurer must also keep replacement notifications for at least 5 years. Conservation efforts must be truthful; the insurer may not make false or misleading statements about the new coverage.

Enhanced Free Look and Restarted Clocks

A policy or annuity that replaces existing coverage carries an extended 30-day free look so the consumer has extra time to compare. Equally important, the replacement contract starts fresh clocks:

• A new 2-year incontestability period, and
• A new 2-year suicide exclusion (life insurance).

These restarts are a core disclosure item and a frequent reason a replacement is not in the consumer's best interest.

Prohibited Practices

Twisting

Twisting is using misrepresentation or incomplete comparison to induce a policyholder to drop one company's policy for another's. Examples:

• Falsely calling the existing policy "worthless" or "obsolete"
• Hiding the new surrender-charge period or restarted contestability
• Overstating the new policy's projected non-guaranteed values

Churning

Churning is twisting within the same insurer — generating commissions by repeatedly replacing a client's policies, often by stripping cash value from an existing contract to fund a new one.

Records Retention Summary

Producer Best-Interest Checklist Before Recommending a Replacement

Virginia expects the producer to document a genuine comparison, not a sales pitch. Before recommending replacement the producer should:

1. Compare existing and proposed coverage objectively — face amount, premium, cash value, riders, and guaranteed elements side by side.
2. Quantify the cost of replacing: surrender charges on the old contract, new acquisition charges, and the new surrender schedule.
3. Disclose the restarted 2-year contestability and suicide periods and any new waiting periods.
4. Consider the insured's current insurability — a new policy requires fresh underwriting, and a health change since the original issue could mean a higher rating or decline.
5. Document the basis for concluding the replacement serves the consumer's best interest, and retain it for 5 years.

Where Replacement Rules Intersect the Whole Chapter

Replacement ties together the three sections of this chapter. The free look doubles to 30 days; the incontestability and suicide clocks from Section 2.1 restart; and for annuities the best-interest and suitability obligations from Section 2.2 apply with extra scrutiny. A worked scenario: a 68-year-old surrenders a 9-year-old whole life policy (cash value $40,000, contestability long expired) to buy a new policy. The new policy imposes a fresh surrender-charge schedule, a new 2-year contestable period, and underwriting at age 68.

Unless the new coverage offers a benefit the old one cannot — and the producer documents it — the Bureau would view this as a presumptively unsuitable replacement.

Exam Tip: The phrase "new contestable period begins" is the most-tested disclosure consequence of replacement. If an exam question asks what the consumer loses by replacing, the answer is usually the already-elapsed incontestability protection restarting from zero.