2.3 Washington Replacement Rules

What Counts as a Replacement

Washington's replacement regulation lives in WAC chapter 284-23. A replacement is any transaction in which a new life policy or annuity is bought and, as a result, an existing Washington policy is:

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

The last bullet is the classic exam trap: pulling a policy loan to fund a new premium is a replacement even though the old policy technically stays in force.

Required Disclosures and Notices

When a sale involves replacement, the producer must, at application:

1. Present and obtain the applicant's signature on the "Notice Regarding Replacement," which lists every policy to be replaced and warns the consumer to compare carefully.
2. Submit a list of the replaced policies to the replacing insurer with the application.
3. Leave the applicant a copy of all sales proposals used.

The notice must alert the consumer to the consequences that matter most:

Notice to the Existing Insurer — WAC 284-23-455

Under WAC 284-23-455, the replacing insurer must send each existing insurer a written communication advising of the replacement within three (3) working days of the date the application is received in its home/regional office, or the date the new contract is issued — whichever is sooner. The existing insurer then gets a conservation period to contact the owner and try to keep the business.

Worked example: A producer's replacement application reaches the carrier's regional office on Monday. The replacing insurer must notify the old insurer no later than Thursday (three working days). Missing that window is a market-conduct violation even if the sale itself was suitable.

Conservation Rights of the Existing Insurer

Once notified, the existing insurer may conserve the business. It can:

• Contact the policyholder and explain the value of the existing coverage
• Furnish a policy summary or ledger statement (it must respond to a request from the replacing insurer within five working days)
• Offer alternatives — a loan, a paid-up option, or a better rider — to keep the policy in force

The existing insurer may not make false or misleading statements about the new insurer or product, and it must ultimately honor the owner's final decision.

Prohibited Practices — RCW 48.30

Twisting (RCW 48.30.180)

Twisting is using misrepresentation or incomplete comparisons to induce a policyholder to lapse, surrender, or replace existing coverage. Examples:

• Calling the existing policy "worthless" when it has real cash value
• Hiding the new contract's surrender charges or the restarted contestable period
• Overstating the new policy's guaranteed returns

Churning

Churning is twisting against the same insurer's policies — repeatedly replacing or using existing cash values to generate new commissions without consumer benefit.

Penalties flow from RCW 48.30 and the OIC's enforcement authority (RCW 48.17): license suspension or revocation, civil fines, restitution to harmed consumers, and referral for criminal prosecution in egregious cases.

Records Retention

The rule is three years or until the conclusion of the next regular examination by the insurer's state of domicile, whichever is later — not a flat five years. That is a frequently mis-remembered number on the state-law section.

Exam tip: Tie the threes together — notice to the existing insurer is 3 working days, and records are kept 3 years or until the next exam. The two-year numbers (incontestability, suicide) restart on the new policy.

Duties That Stay With the Producer

Before recommending any replacement, the producer must complete a disciplined process the OIC expects to see in the file:

1. Compare objectively — lay the existing and proposed contracts side by side: face amount, premium, cash value, surrender charges, and the restarted contestable/suicide periods.
2. Confirm best interest — under the same best-interest standard that governs annuity sales, the change must benefit the consumer, not just generate a commission.
3. Disclose fully — surrender charges on the old policy, new charges on the replacement, and any loss of accumulated cash value.
4. Obtain signatures — the applicant signs the Notice Regarding Replacement; the producer signs and dates it.
5. Document and retain — keep the analysis for three years or until the next exam.

When the Transaction Is NOT a Replacement

Knowing the exclusions is as tested as the triggers. The following are generally not replacements requiring the notice:

Common trap: Surrendering a 7-year-old whole life policy with a healthy cash value to buy a new policy is a replacement and triggers full disclosure; merely buying a second, additional policy while keeping the first untouched is not. Read the fact pattern for whether the existing coverage is being terminated, reduced, or borrowed against — that single question decides whether the entire replacement machinery applies.