Replace a policy responsibly and use the free look

What you will learn

• Recognize replacement even when the old policy remains in force.
• Apply the replacement-rule exemptions without overlooking retained disclosure duties.
• Distinguish agent, replacing-insurer and direct-response responsibilities.
• Apply the ordinary and replacement return periods using delivery and written-cancellation facts.

Before you start

Recall that surrender ends a policy for its available surrender value, while reduced paid-up insurance and extended term use existing value to continue coverage in a different form. A policy loan uses policy value as security. The free look is an opportunity to examine a delivered contract and return it under the applicable cancellation provision.

Replacing insurance is a decision about two contracts, not just buying a new one. Ask what the purchase will do to the old policy, what information the buyer must receive and what deadlines apply. A signed notice does not prove the new policy is better; it makes the replacement visible and gives the buyer information to consider.

Follow Omar, who owns life insurance and is considering a new policy. First determine whether the transaction is a replacement. Then follow the duties for the way it is being sold. Finally, distinguish the buyer's right to return the new contract from the earlier application and notice steps.

Look at what happens to the old policy

Under NAC 686A.526, replacement involves a new policy to be purchased when the proposing agent or insurer knows or should know that, because of the transaction, an existing policy has been or will be affected in one of the listed ways:

• It lapses, is forfeited, is surrendered in whole or part, is assigned to the replacing insurer or otherwise ends.
• It becomes reduced paid-up or extended term insurance, or its value is otherwise reduced through nonforfeiture benefits or other policy values.
• Its benefits, coverage duration or duration of benefit payments are reduced by amendment.
• It is reissued with a reduction in cash value.
• It is pledged or borrowed against in an aggregate amount exceeding 25 percent of its stated loan value.
• It is used in a financed purchase.

An existing policy can include coverage under a binding or conditional receipt or a policy still within an unconditional-refund period. The definition excludes a policy obtained by exercising a dividend option. The replacing insurer is the company issuing the new policy as a replacement.

A financed purchase, in the explanatory terminology used by the NAIC replacement model, uses or intends to use funds withdrawn, surrendered or borrowed from an existing policy to pay some or all of a new policy's premium. Nevada's current replacement definition expressly includes a financed purchase. The model helps explain the term; its other procedures and presumptions are not automatically Nevada rules.

For Omar, keeping the old policy technically in force is therefore not a complete answer. Reducing it to paid-up coverage to support the new purchase can still be replacement. So can a partial surrender connected to the transaction. The agent must examine the actual arrangement, not only whether Omar checked a box labelled replacement.

Case: The old policy is not cancelled

Omar will buy a new life policy and, because of that transaction, convert his existing policy to reduced paid-up insurance. The agent knows the plan but marks no replacement because the old policy will still provide some coverage. What is wrong with that conclusion?

Use the right percentage and keep the other triggers

The borrowing or collateral test uses aggregate borrowing or pledging above 25 percent of the policy's loan value, not 25 percent of its face amount. Aggregate means the total amount of loans and pledges against the policy, including existing ones.

Suppose the stated loan value is $20,000. Twenty-five percent is $5,000. An aggregate $6,000 pledge or borrowing exceeds that threshold. The face amount might be much larger, but it is not the denominator in this provision.

Change the aggregate amount to exactly $5,000. That is equal to, not greater than, 25 percent, so it does not satisfy this particular exceeds test. It does not create a safe harbor from all the other replacement triggers. For example, a partial surrender or financed purchase must still be assessed on its own facts.

Case: A misleading safe harbor

An agent says, "The planned borrowing is only 25 percent of the loan value, so this transaction can never be replacement." What can you conclude from that percentage alone?

Check exemptions before applying the detailed procedure

NAC 686A.540 excludes specified transactions from the replacement regulations. Learn their conditions rather than reducing them to broad product labels:

• Individual credit life policies.
• Group life, group credit life and life issued with a pension, profit-sharing or other benefit plan qualifying for premium tax deductibility. However, for replacement of such a plan, the agent must fully disclose all material facts to the person in charge of the plan.
• The specified separate-account variable life whose death benefits and cash values vary with investment-unit values.
• Applications to an insurer under an existing policy for a contractual change or exercise of a conversion privilege.
• An existing term policy that is nonconvertible, expires in five years or less and cannot be renewed. All three conditions matter.
• Proposed life coverage replacing coverage under a binding or conditional receipt issued by the same company.
• A direct-response policy with a face value of $5,000 or less.

Direct response means the prospective buyer responds directly to the insurer and no agent is used in the sale or delivery. It does not mean every transaction begun online is automatically within that definition.

An exemption from this procedure is not a license for false statements. The group-plan provision illustrates the distinction: the detailed regulation does not generally apply, but its express material-fact disclosure duty remains.

Case: One missing condition

Omar's old term policy expires in four years and is nonconvertible, but it can be renewed. An agent claims the existing-term exemption. Does the policy meet all of that exemption's conditions?

Carry out the agent's notice duties

For an applicable life application, NAC 686A.550 requires the agent to indicate whether an existing policy will be replaced. When replacement is involved, the agent presents the replacement notice, signs it, obtains the applicant's signature on a copy and gives the applicant a copy. The agent keeps the notice and any sales proposals for at least three years after signing the notice.

A sales proposal here is a written comparison aid used to support replacing or retaining an existing policy, excluding the policy summary. Generally descriptive material kept in the insurer's advertising file is also outside that definition. Do not assume that every document has the same record-retention category.

The prescribed notice in .563 draws attention to age and health, possible financial loss or higher premiums, and the additional costs of acquiring the new policy, including commissions. It asks the buyer to consider whether the existing policy could be changed to meet present needs. It also explains the new policy's 30-day decision period, the signature requirement and notification of the existing insurer.

This notice must be substantially the prescribed form, not merely an agent's reassurance that switching is a good idea. Under .567, when the agent recommends replacement and presents the notice, the agent explains its provisions if the applicant asks, but must not criticize those provisions. A buyer who asks why the notice discusses costs deserves an explanation, not dismissal of the notice as meaningless paperwork.

NAC 686A.570 preserves the policyholder's right to replace. It also treats an agent as knowing the existing policy exists, despite the policyholder's failure to identify replacement, if the agent replaces it more than once or shows a pattern of disregarding its existence. The broader definition already uses knows or should know. A checkbox is not a substitute for the transaction's facts.

Separate the replacing insurer's obligations

Under NAC 686A.555, the replacing insurer informs its agents of the replacement requirements and supplies three notice copies to agents who may solicit replacements. It keeps the notice and policy summary until the later of at least three years after the applicant signs or the conclusion of the next regular examination by its home-state insurance department.

If the replacing company is not the existing insurer, it sends the existing insurer a notice copy within three working days after receiving the application. It cannot issue the new policy until a signed notice copy is attached to the application.

The agent's three-year rule and the insurer's later-of rule are different. Suppose three years have passed but the insurer's next regular home-state examination has not concluded. The insurer cannot treat the three-year anniversary alone as the end of its required retention period.

Case: Issue now, sign later

The replacing insurer receives Omar's application without the signed replacement notice. A representative wants to issue the policy immediately and obtain the signature at delivery. What does .555 require?

Use the direct-response sequence when no agent is involved

NAC 686A.560 gives direct-response insurers a separate sequence. They educate the personnel making the sales and require a signed applicant statement declaring whether replacement will occur. They also require the replaced-policy list and the names of the existing insurers.

Within five days after receiving the application, the insurer mails three notice copies for signature and return. If it is not the existing insurer, it sends a notice copy to the existing insurer within three working days after receiving the signed notice and the existing-policy list. It must receive the signed notice before issuing the policy.

The direct-response insurer keeps the notice and the policy summary provided to the applicant for the same later-of period: at least three years after the applicant signs or until the next regular home-state examination concludes, whichever is later.

Notice the different clock starters. For .555's replacing insurer, the three-working-day notification clock starts with receipt of the application. For .560's direct-response process, it starts with receipt of the signed notice and list. The separate five-day mailing period begins with application receipt; the rule does not call those five days working days.

Case: The wrong starting event

A direct-response insurer has the application but has not yet received the signed replacement notice and list. A trainee says its three-working-day existing-insurer notification period necessarily began with the application. Which two events is the trainee confusing?

Compare contracts rather than presenting replacement as automatically better

NRS 686A.060 authorizes the Commissioner to require written, signed and dated comparisons of old and proposed life-policy terms, conditions and benefits through regulation. That statutory authorization should not be turned into an invented universal form requirement. Apply the actual regulations governing the transaction.

For replacement of an existing individual fixed deferred annuity with a new annuity, NAC 686A.573 specifically requires a written, signed and dated comparison and an annuity-replacement notice. The comparison includes penalties, premium-tax implications, bonus vesting and additional costs. Vesting concerns when a bonus becomes the owner's to keep under the contract's conditions. The notice discusses potential gains and losses, the possibility of modifying the old contract, the 30-day decision period and the signature and existing-insurer notification process.

Section .577 requires explanation of the new annuity without inaccurate descriptions or other misrepresentation of the old one. These provisions supplement the life-replacement lesson; they do not replace other applicable annuity obligations.

For Omar's life decision, use the notice's questions to slow down a superficially attractive comparison. What will the new acquisition cost? How do age and health affect the proposal? Could the existing policy be changed? The notice protects an informed choice; it does not dictate that keeping the old policy or replacing it is always best.

Start the return period with delivery to the owner

NRS 688A.165 requires the applicable annuity, pure endowment or life contract to contain the return provision or an attached notice. For a contract that is not a replacement, it provides a ten-day period from delivery to the owner. For a replacement, it provides thirty days after delivery to the owner. This section does not apply to industrial life policies.

The owner surrenders the contract or policy to the insurer together with a written cancellation request. The insurer refunds premiums paid, including policy or contract fees and other charges. A phone call alone is not the surrender-plus-written-request procedure described in this section. Do not change delivery into application date, issue date or the date the first premium was paid.

Suppose Omar applied on September 20, 2026, but the applicable nonreplacement policy was delivered on October 1, 2026. He surrenders it with a written cancellation request on October 8. That is seven days after delivery, inside the ten-day period; the older application date does not defeat this delivery-based right. If the transaction is a replacement and the same delivery occurred on October 1, surrender with the written request on October 20 is nineteen days after delivery, within thirty days.

These examples avoid the final boundary day. In an actual return, use the contract's delivery record and return instructions and act within the applicable period. Do not assume that cancelling a new replacement automatically restores every feature of an old policy already changed or surrendered; that separate policy's status still needs to be checked.

Case: Premium back, fee kept?

Assume Omar properly returns an applicable replacement life policy with a written cancellation request nineteen days after delivery. He paid a $240 premium and a $15 policy fee. The insurer proposes refunding $240 and retaining the fee. What amount does the statutory refund provision cover on these facts?

Keep three decisions separate

First, classify the transaction by what the new purchase does to the existing coverage, then test the relevant exemption. Second, follow the duties and deadlines for the agent-assisted or direct-response route. Third, use delivery and the ordinary-versus-replacement distinction to determine the new contract's return period.

Do not confuse this cancellation right with Lesson 27's separate unconditional-refund condition of at least twelve days for delayed delivery of life-disclosure documents. A replacement notice, a buyer's guide and a written cancellation request serve different purposes at different stages.

Sources

Nevada Legislature, replacement regulations, NAC 686A.510–.577: https://www.leg.state.nv.us/NAC/NAC-686A.html
Nevada Legislature, replacement-comparison authority, NRS 686A.060: https://www.leg.state.nv.us/NRS/NRS-686A.html
Nevada Legislature, return and cancellation, NRS 688A.165: https://www.leg.state.nv.us/NRS/NRS-688A.html
Cornell Legal Information Institute, replacement definition: https://www.law.cornell.edu/regulations/nevada/NAC-686A-526
Cornell Legal Information Institute, replacing-insurer duties: https://www.law.cornell.edu/regulations/nevada/NAC-686A-555
Cornell Legal Information Institute, direct-response duties: https://www.law.cornell.edu/regulations/nevada/NAC-686A-560
Public.Law, return and cancellation: https://nevada.public.law/statutes/nrs_688a.165
NAIC Model Regulation 613, explanatory financed-purchase terminology, not a statement of Nevada's adoption of every model provision: https://content.naic.org/sites/default/files/model-law-613.pdf