2.3 West Virginia Replacement Rules

What Counts as a Replacement

Replacement is any transaction in which new life insurance or an annuity is purchased and, because of that transaction, an existing policy is changed for the worse. West Virginia's Rule 114CSR8 lists the triggering events:

• The existing policy is lapsed, forfeited, surrendered, or otherwise terminated
• It is converted to reduced paid-up or continued as extended term
• Its values are amended to reduce benefits or the term
• It is reissued with a reduction in cash value
• A policy loan or withdrawal of 25% or more of cash value is taken to fund the new contract (a "financed purchase")

If none of these happens, it is not a replacement and the special rules do not apply. The exam often disguises a financed purchase — borrowing against an old policy to pay the new premium — as if it were not a replacement. It is.

Required Disclosures and the Replacement Notice

When the application shows existing coverage, the producer must present and read to the applicant, no later than at the time of application, a Notice Regarding Replacement. Key mechanics:

The producer must also submit to the replacing insurer a list of the policies to be replaced and a copy of any sales material used.

Duties of the Replacing and Existing Insurers

The replacing insurer carries the heaviest burden under 114CSR8:

• Notify each existing insurer within 5 business days of receiving a completed application that indicates replacement (or as soon as replacement is identified). This lets the existing insurer prepare a conservation effort and an in-force illustration.
• Maintain records of replacement transactions for the period the Commissioner requires (commonly 5 years or until the next market-conduct exam).
• Provide the extended 30-day free look — the replacing insurer's policy may be surrendered within 30 days of delivery for a full refund of premium paid.
• Send the applicant a copy of any illustration or notice used.

The existing insurer, once notified, may send the policyholder a communication explaining the values of the in-force contract so the consumer can compare — but it may not engage in deceptive conservation.

Why Replacement Hurts the Consumer (the Comparison)

The disclosures exist because a replacement quietly strips away protections the consumer already earned:

Prohibited Practices

• Twisting: inducing replacement through misrepresentation or incomplete comparison — e.g., calling the existing policy "worthless," hiding surrender charges, or showing only the new policy's upside. Twisting is an unfair trade practice under Article 33-11.
• Churning: a producer replacing a client's own policies (or a pattern across the book of business) primarily to generate new commissions, often using the policy's own values to fund the new premium.

Both are subject to OIC enforcement: license suspension or revocation, fines, and restitution.

Exam Focus

Identify the trigger event first — lapse, surrender, reduction, loan/financing, or conversion driven by a new sale. Then ask the three exam questions: Who must give notice? (the producer reads and both sign the replacement notice; the replacing insurer notifies the existing insurer within 5 business days). What disclosure is delivered? (the signed Notice Regarding Replacement plus a comparison). What protections is the consumer losing? (fresh contestability and suicide periods, surrender charges, higher-age cost). The safest answer protects the applicant's guarantees and demands clear written disclosure.

Worked scenario: A producer tells a client her 12-year-old policy "has no value" and should be dropped for a new one, omitting that the old policy is fully incontestable and has $9,000 cash value. That is twisting — a material misrepresentation to induce replacement — even if the new policy is otherwise fine.

The Conservation Window and Direct-Response Sales

Once the existing insurer receives the replacing insurer's notice, it may attempt a conservation effort — contacting its policyholder to present the in-force values and arguments for keeping the existing contract. The rule keeps this fair: the existing insurer must provide accurate policy-value information and may not use the conservation contact to deceive or pressure. The point of the notice-plus-conservation structure is to put both products on the table so the consumer makes an informed comparison rather than a one-sided one.

Direct-response sales (mail, phone, internet, with no producer in the room) follow a parallel track. Because no producer reads the notice aloud, the replacing insurer must deliver the replacement notice to the applicant at the time the policy is delivered and still provide the extended free look. Exam items sometimes ask who delivers the notice when there is no agent — the answer is the replacing insurer, by mail with the policy.

Comparing Replacement vs. 1035 Exchange

A Section 1035 exchange lets a policyowner swap one life or annuity contract for a like-kind contract without triggering current income tax on the gain. A 1035 exchange is still a replacement for purposes of 114CSR8 — the consumer-protection notices, the comparison, and the new contestability/suicide periods all apply. The 1035 rules only address the tax treatment; they do not waive the state replacement disclosures. A trap answer claims that "a 1035 exchange is not a replacement" because no tax is due. It is a replacement.

Recordkeeping and Penalties

The replacing insurer must keep replacement records and sales material for the period the Commissioner requires (commonly 5 years). Twisting and churning are unfair trade practices under Article 33-11; the OIC may levy fines, order restitution to harmed consumers, and suspend or revoke the producer's license. Repeat or willful violations escalate the penalty.