Replace a Policy Responsibly and Use the Free Look

What this lesson helps you do

People sometimes buy a new life insurance policy in a way that ends, shrinks, or drains a policy they already own. Nevada calls that a replacement. Replacement is allowed. The rules exist so the buyer understands what they may lose before they make the swap. Nevada also gives buyers of covered new life policies (excluding industrial life) and annuities a short window after delivery to change their mind and get their money back. That window is commonly called the free look.

By the end of this lesson, you should be able to:

• Decide whether a transaction is a replacement under Nevada's rules, including cases where the old policy stays in force.
• Apply Nevada's seven exemptions, including the disclosure duty that still applies to group plans.
• Describe what the agent, the replacing insurer, and a direct-response insurer must do, and identify the event that starts each deadline.
• Explain what the replacement notice tells the applicant and where written comparisons are required.
• Decide whether a cancellation request falls within the 10-day or the 30-day free look, and what refund is owed.

Before you start. This lesson builds on Keep coverage in force and understand a lapse, Use cash values without confusing the choices, Deliver and explain the policy, Recognize prohibited conduct and handle client money, and Use honest advertising and required disclosures. You'll need these terms from those lessons: lapse, cash value, loan value, reduced paid-up, extended term, and delivery.

All people, dates, and dollar amounts in this lesson are fictional or stipulated for practice.

The central idea: watch what happens to the old policy

Replacement: someone buys a new policy, and because of that deal, the old policy is ended, cut back, or drained of value.

The test does not ask whether the old policy disappears. It asks whether the deal for the new policy harms the old one in one of six specific ways. It also asks whether the agent or insurer proposing the new policy knows, or should know, that this is happening.

Start with a simple case. Fictional case: Dana owns a whole life policy. An agent recommends a new policy, and Dana plans to stop paying on the old one so it lapses. That is a replacement. The old policy ends because of the new purchase.

Change one fact: Dana keeps paying the old policy in full, leaves its values alone, and buys the new policy as extra coverage. That is not a replacement. Nothing in the deal ends, reduces, or draws on the old policy.

Change a different fact: Dana keeps the old policy, but converts it to reduced paid-up insurance to free up money for the new premiums. The old policy still exists, but this is a replacement. Converting to reduced paid-up is one of the six triggers.

The tempting mistake is to think, "The old policy is still in force, so this isn't a replacement." A policy can stay in force and still be harmed.

The six ways an old policy can be replaced

Under Nevada's rule, a new-policy transaction is a replacement when the proposing agent or insurer knows or should know that the existing policy has been or will be:

1. Ended. The policy is lapsed, forfeited, surrendered in full or in part, assigned to the replacing insurer, or terminated in some other way.
2. Reduced by using its values. The policy is converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by using its nonforfeiture benefits or other values.
3. Amended to give less. Benefits are reduced, or the period of coverage or benefits is shortened.
4. Reissued with less cash value.
5. Pledged or borrowed against beyond a limit. The policy is pledged as collateral or borrowed against for a combined amount that is more than 25 percent of the loan value stated in the policy.
6. Used in a financed purchase.

Items 1 through 4 are fairly direct. Items 5 and 6 cause most of the errors, so we'll work through each one.

The 25 percent test uses loan value, not face amount

Loan value: the amount the policy says the owner can borrow against it. This is different from the face amount, which is the death benefit.

Worked example (stipulated amounts): A policy has a $100,000 face amount and a $20,000 loan value. As part of an agent's proposal, the owner will borrow $6,000 against it.

• Step 1: Find the loan value. It is $20,000.
• Step 2: Take 25 percent. $20,000 × 0.25 = $5,000.
• Step 3: Compare. $6,000 is more than $5,000, so item 5 applies. This is a replacement.

Why the face amount gives the wrong answer: 25 percent of $100,000 is $25,000. That figure would make $6,000 look harmless. The rule measures against loan value because loan value is the money actually at risk.

Change one fact: The owner borrows exactly $5,000. That amount does not exceed 25 percent, so item 5 does not apply. This does not mean the deal is automatically safe. You still check the other five items, especially the next one.

The rule counts the aggregate, meaning the combined total of the pledging and borrowing, not just one piece of it.

Financed purchase: paying for the new policy with the old one

Nevada lists financed purchase as its own trigger. In plain terms, a financed purchase means using money taken from the old policy's values to pay premiums on the new policy. That money might come from a withdrawal, a surrender, or a loan.

The 25 percent limit belongs only to item 5. Item 6 has no dollar threshold and no time window written into it. The question is simply whether the old policy's values are being used to pay for the new one.

Worked example (stipulated amounts): The same owner borrows only $2,000 from the old policy, which is well under the $5,000 limit. The agent's plan uses that $2,000 to pay the new policy's first premium. Item 5 does not apply, but item 6 does. This is a replacement.

Checkpoint: Is it a replacement?

For each fictional case, decide whether it is a replacement and name the item or items that apply.

1. Lee keeps an existing term policy, but the agent's plan reduces its death benefit from $150,000 to $50,000 so Lee can afford the new policy.
2. Morgan's old policy has a $12,000 loan value and an $80,000 face amount. Under the agent's proposal, Morgan will borrow $4,000 from it and use that money to pay the new policy's first-year premium.
3. Same as case 2, but Morgan borrows $2,500 instead.

Answer: Explanation

1. Yes, item 3. The old policy is amended to reduce benefits. Keeping the old policy does not prevent a replacement.
2. Yes, items 5 and 6. Twenty-five percent of the $12,000 loan value is $3,000, and $4,000 exceeds it. The borrowed money also pays the new premium, which makes this a financed purchase. If you used the face amount, you'd get $20,000 and wrongly decide that item 5 doesn't apply.
3. Yes, item 6 only. $2,500 is under the $3,000 limit, so item 5 doesn't apply. The money still pays the new premium, so this is a financed purchase. Falling under 25 percent is not an exemption.

The "no" checkbox doesn't end the question

The definition depends on what the agent or insurer knows or should know from the transaction itself. Suppose an applicant marks "no replacement," but the agent's own plan shows the old policy being surrendered. The agent knows a replacement is happening, and the agent's duties apply.

Nevada goes further. An agent is treated as knowing about an existing policy, whatever the policyholder says, if the agent:

• replaces a policy more than once, or
• shows a pattern of conduct that disregards existing policies.

These rules do not take away anyone's right to replace a policy. They control how a replacement is handled, not whether it is allowed.

Terms you'll use in the duties

• Existing policy: a policy currently in force. This includes coverage under a binding or conditional receipt and a policy still inside its unconditional refund period. It does not include a policy obtained by exercising a dividend option.
• Replacing insurer: the company that issues the new policy as a replacement.
• Existing insurer: the company that issued the old policy. Keep these two roles apart. Most notice deadlines involve the replacing insurer sending something to the existing insurer.
• Direct response: the buyer responds directly to the insurer, and the insurer uses no agent to sell or deliver the policy. Buying online does not automatically make a sale direct response. If an agent is involved in the sale or delivery, it is not direct response.
• Notice: the required replacement notice, which is covered below.
• Sales proposal: any written sales aid used to compare the existing policy with the proposed one in support of a recommendation to replace or keep the old policy. A policy summary is not a sales proposal. General descriptive material kept in the insurer's advertising file is not a sales proposal either.

The seven exemptions

Nevada's replacement rules do not apply to:

1. An individual credit life policy.
2. Group life, group credit life, or life insurance issued in connection with a pension, profit-sharing, or other benefit plan that qualifies for tax-deductible premiums. One duty survives: when such a plan is being replaced, the agent must fully disclose all material facts to the person in charge of the plan.
3. Variable life insurance whose death benefits and cash values vary with investments held in a separate account.
4. An application to the insurer under an existing policy for a contractual change or to exercise a conversion privilege.
5. An existing term policy that meets all three conditions: it is nonconvertible, it will expire in 5 years or less, and it cannot be renewed.
6. New insurance replacing coverage under a binding or conditional receipt from the same company.
7. A policy sold through direct response with a face value of $5,000 or less.

Two traps are worth noting. In exemption 5, a short-term policy that can be renewed fails the test. In exemption 7, the measure is the face value. That is the opposite of the 25 percent trigger, which uses loan value.

Checkpoint: Does an exemption apply?

1. An existing term policy expires in 4 years and is nonconvertible, but it can be renewed. Is it exempt?
2. An employer is moving its group life plan to a new carrier. Do any replacement duties remain?
3. An insurer sells a $5,000 face policy by direct response, with no agent involved. Is it exempt? What if the face amount is $10,000?
4. A policyholder uses a conversion privilege in their own term policy to switch to permanent coverage with the same insurer. Is it exempt?

Answer: Explanation

1. Not exempt. All three conditions must be met, and this policy is renewable.
2. Yes, one remains. Group plans are exempt from the general rules, but the agent must fully disclose all material facts to the person in charge of the plan being replaced. It is wrong to say that all duties vanish for group coverage.
3. Exempt at $5,000. At $10,000 the exemption no longer applies. If a replacement is involved, the direct-response duties apply.
4. Exempt. Exercising a conversion privilege under an existing policy is listed exemption 4.

Who does what: agent-sold replacements

The agent

On every life application, the agent must mark whether an existing policy will be replaced. This applies even when the answer is no.

If a replacement is involved, the agent must:

1. Present the notice to the applicant.
2. Sign the notice, get the applicant's signature on a copy, and give the applicant a copy.
3. Keep a copy of the notice and copies of any sales proposals for at least 3 years after signing the notice.

These duties attach to the application. The agent cannot hold the notice until the policy is delivered. The replacing insurer may not issue the policy until a signed notice is attached to the application, so a notice saved for delivery is too late.

The replacing insurer

The replacing insurer must:

• Inform its agents of the replacement rules.
• Give each agent who may solicit replacements three copies of the notice.
• If it is not the existing insurer, send a copy of the notice to the existing insurer within 3 working days after receiving the application.
• Not issue the policy until the signed notice is attached to the application.
• Keep the notice and the policy summary for at least 3 years after the applicant signs the notice, or until the end of the next regular examination by its home state's insurance department, whichever is later.

Retention example (fictional): An applicant signs the notice in June 2026, so 3 years runs to June 2029. If the insurer's next regular exam ends in September 2029, the insurer keeps the records at least through September 2029. If that exam ended in December 2027, the 3-year date is later, so the insurer keeps them at least through June 2029. The agent's retention period is simpler: 3 years after signing, with no exam comparison.

Who does what: direct-response replacements

No agent is involved here, so the insurer takes on the work. A direct-response insurer must:

• Inform its sales personnel of the rules.
• Require, with each completed application, a statement signed by the applicant saying whether an existing policy will be replaced.
• Require the applicant to list the policies being replaced and the names of their insurers.
• Within 5 days after receiving the application, mail the applicant three copies of the notice to sign and return. The rule says "5 days," not "working days."
• If it is not the existing insurer, send a copy of the notice to the existing insurer within 3 working days after receiving the signed notice and the list.
• Not issue the policy until it has received a signed notice from the applicant.
• Keep the notice and the policy summary given to the applicant under the same "3 years or next exam, whichever is later" rule.

Same length, different starting events

Both kinds of insurer have a "3 working days" deadline to notify the existing insurer, but the clocks start at different events.

Fictional timeline: Two insurers each receive a replacement application on Tuesday, October 6, 2026.

• Agent-sold insurer: The 3-working-day clock starts on October 6, when the application arrives.
• Direct-response insurer: It mails the three notice copies on Thursday, October 8, which is well inside its 5 days. The applicant returns the signed notice and the policy list, and they arrive Monday, October 19. That insurer's 3-working-day clock starts on October 19, not October 6.

The tempting mistake is to assume that every 3-day clock starts when the application arrives.

Checkpoint: Duties and clocks

1. An agent plans to have the client sign the replacement notice when the policy is delivered. What's wrong with that?
2. A direct-response insurer receives a signed notice and policy list several days after it received the application. Which date starts its deadline to notify the existing insurer?
3. Which records does the agent keep, and which does the replacing insurer keep?

Answer: Explanation

1. The agent's duties are tied to the application, and the insurer cannot issue the policy until a signed notice is attached to the application. Waiting until delivery reverses the required order.
2. The date it receives the signed notice and the list. The application date starts the agent-sold insurer's clock, not this one.
3. The agent keeps the notice and any sales proposals for at least 3 years after signing. The replacing insurer keeps the notice and the policy summary for at least 3 years or until the end of the next regular exam, whichever is later.

What the replacement notice says, and where comparisons fit

The notice uses wording prescribed in Nevada's regulation, and the form must be in substantially that wording. In plain terms, it tells the applicant that:

• They have been offered a policy to replace all or part of their existing coverage.
• Before replacing, they should consider whether their age or health could cause a financial loss under the new policy, or higher premiums.
• They will have added costs to get the new policy, including the agent's commission.
• They should talk with their agent or the existing company about whether the old policy could be changed to fit their needs.
• The new policy gives them 30 days to decide whether to keep it.
• The agent must get their signature, and the existing insurer will be told about the possible replacement.

This summary is for learning. It is not a substitute for the regulation's form.

Agent conduct: When an agent recommends a replacement and presents the notice, the agent must explain the notice if the applicant asks. The agent may not criticize it. For example, saying "That form is just boilerplate, don't worry about it" breaks this rule.

Written comparisons

• Life insurance. A Nevada statute allows the Commissioner to require, by regulation, written, signed, and dated statements that fully and accurately compare the old and new life policies. The current life replacement rules in this lesson require the notice and require agents to keep any sales proposals they used. They do not set out a separate comparison form for every life replacement.
• Individual fixed deferred annuities. When someone replaces, offers to replace, or proposes to replace an existing individual fixed deferred annuity with a new annuity, the insurer or producer must give the buyer: 1. A written, signed, and dated comparison of the terms, conditions, and benefits of the old and new contracts. It must include any penalties, premium tax effects, bonus vesting schedule, and other added costs. 2. An annuity replacement notice. That notice tells the buyer to weigh the gains and losses of replacement, warns of possible added costs, suggests asking whether the existing contract can be revised, states the 30-day decision period, and confirms that the buyer received the comparison.

Anyone recommending an annuity replacement must explain the new contract without inaccurately describing the old one.

Checkpoint: Notice and comparisons

1. A client asks what "financial loss because of your age or health" means. What may the agent do, and what may the agent not do?
2. A producer proposes replacing a client's individual fixed deferred annuity. What two documents must the client receive?

Answer: Explanation

1. The agent may explain the notice when asked. The agent may not criticize it or play it down. For example, the agent can explain that a person who is older or less healthy now may pay more, or qualify for less, than under the old policy.
2. A written, signed, and dated comparison that covers penalties, premium tax effects, bonus vesting, and other costs, plus the annuity replacement notice.

The free look: 10 days or 30 days after delivery

Free look: a short period after the owner receives the policy during which they can return it with a written cancellation request and get back everything they paid.

Nevada requires every life insurance policy, annuity, and pure endowment contract to include this right, either as a policy provision or as an attached notice:

• Not a replacement: 10 days from the date the policy is delivered to the owner.
• A replacement: 30 days after the policy is delivered to the owner.
• How to cancel: surrender (return) the policy to the insurer together with a written request for cancellation. A phone call alone does not meet this requirement.
• Refund: any premium paid, including policy fees and other charges. Fees are not kept back.
• Exception: industrial life insurance policies. These have a face amount of $2,500 or less, are labeled as an industrial or weekly premium policy, and have premiums due monthly or more often.

Worked example: counting from delivery

Fictional case, stipulated amounts: Avery applies on September 10, 2026. The policy is delivered on October 1, 2026. Avery paid a $240 premium and a $15 policy fee. This is not a replacement.

On October 8, Avery returns the policy with a written cancellation request.

• Step 1: Find the start date, which is delivery: October 1.
• Step 2: Count. October 1 to October 8 is 7 days.
• Step 3: Compare. 7 days is inside the 10-day period.
• Step 4: Refund. $240 + $15 = $255.

Tempting mistake: Counting from the September 10 application gives 28 days and leads to the wrong conclusion that Avery is too late. The clock starts at delivery.

Change one fact: Avery sends the request on October 20, which is 19 days after delivery. For an ordinary policy, that is outside the 10 days. If this policy were a replacement, 19 days is inside the 30-day period, and Avery would get the full $255 back.

What happens to the old policy: The free look covers the new contract. It does not promise that an old policy comes back if it was already surrendered or allowed to lapse. Whether that can happen depends on the old policy's own terms. See Keep coverage in force and understand a lapse.

Don't confuse this with the 12-day refund in disclosure rules

Nevada's life disclosure rules require a buyer's guide and policy summary to be given before the insurer accepts the first premium. The exception is a policy or summary that gives an unconditional refund of at least 12 days. In that case, the documents may be delivered with or before the policy. That 12-day figure answers a different question: when must disclosures be delivered? The 10-day and 30-day periods answer how long the owner has to cancel after delivery. See Use honest advertising and required disclosures.

Checkpoint: Free look

1. Jordan's new policy, which is not a replacement, is delivered on Monday, November 2, 2026. On November 5, Jordan calls the insurer to cancel but sends nothing in writing. Has Jordan used the free look?
2. Jordan then returns the policy with a written request on November 9. Jordan paid a $410 premium and a $20 fee (stipulated). Is this in time, and what is the refund?
3. A replacement policy is delivered on November 2. The owner returns it with a written request on November 22. Is this in time?
4. An agent tells a client, "The policy fee isn't refundable if you cancel during the free look." Is that correct?

Answer: Explanation

1. Not yet. The statute requires the policy to be surrendered together with a written request. A phone call alone isn't enough.
2. Yes. November 2 to November 9 is 7 days, which is inside 10. The refund is $410 + $20 = $430.
3. Yes. November 2 to November 22 is 20 days. That is past 10 days, but replacement policies get 30 days after delivery.
4. No. The refund includes any premium paid, plus policy fees and other charges.

Independent practice

Work each question before opening the answer.

Question 1. An agent's proposal has a client keep their old policy but pledge it as collateral for a loan of $7,000. The policy's loan value is $24,000, and its face amount is $200,000. None of the loan money goes toward the new policy. Is this a replacement?

• A) No, because the old policy stays in force
• B) No, because $7,000 is less than 25 percent of the face amount
• C) Yes, because $7,000 exceeds 25 percent of the loan value
• D) Yes, because any pledge is a replacement

Answer: Explanation

C. 25 percent of $24,000 is $6,000, and $7,000 exceeds it. A is wrong because a policy can stay in force and still be replaced. B uses the face amount, which the rule does not use. D is wrong because a pledge counts only when it exceeds the 25 percent limit, unless another item applies.

Question 2. A direct-response insurer selling a $25,000 policy receives an application on which the applicant lists an existing policy to be replaced. What must the insurer do first with the notice?

• A) Send a copy to the existing insurer within 3 working days after receiving the application
• B) Mail three copies to the applicant within 5 days after receiving the application
• C) Issue the policy and attach the notice at delivery
• D) Nothing, because direct-response sales are always exempt

Answer: Explanation

B. The insurer first mails the notices to the applicant. Its 3-working-day clock to notify the existing insurer starts only when the signed notice and the list come back, so A uses the wrong start event. C is wrong because the insurer cannot issue the policy until it receives the signed notice. D is wrong because the exemption covers only direct-response policies with a face value of $5,000 or less.

Question 3. A replacement annuity is delivered to its owner on a Thursday. Sixteen days later, the owner returns it with a written cancellation request. What happens?

• A) Too late, because the free look is 10 days
• B) Too late, because the period ran from the application date
• C) In time, and the insurer refunds the premium but keeps the fees
• D) In time, and the insurer refunds the premium plus fees and other charges

Answer: Explanation

D. A replacement contract gives the owner 30 days after delivery, and 16 days is inside that. The refund includes fees and charges. A applies the non-replacement period. B uses the wrong start event. C misstates what the refund includes.

Recap

• Replacement depends on what happens to the old policy. It can be ended, reduced through its values, amended to give less, reissued with less cash value, pledged or borrowed against beyond 25 percent of loan value, or used in a financed purchase. Keeping the old policy in force does not rule out replacement.
• Being under 25 percent is not an exemption. A financed purchase has no threshold.
• A "no" checkbox does not override what the agent knows or should know. Repeated replacements or a pattern of disregard means the agent is treated as knowing.
• There are seven exemptions. Group plans still require full disclosure of material facts to the person in charge of the plan. The short-term exemption requires a policy that is nonconvertible, expires within 5 years, and is not renewable. Direct-response policies are exempt only at a face value of $5,000 or less.
• Agent: marks the application, presents and signs the notice, gets the applicant's signature, gives a copy, and keeps the notice and any sales proposals for 3 years. This happens at application, because the policy can't be issued without the signed notice.
• Replacing insurer: gives agents three copies of the notice, notifies the existing insurer within 3 working days after receiving the application, and keeps records for 3 years or until the next exam ends, whichever is later.
• Direct-response insurer: mails three notices within 5 days, then notifies the existing insurer within 3 working days after receiving the signed notice and list.
• The notice warns about age, health, added costs, and commissions, and states the 30-day decision period. An agent explains it if asked and never criticizes it. Fixed deferred annuity replacements also require a written, signed, and dated comparison.
• Free look: 10 days from delivery for ordinary policies and 30 days after delivery for replacements. The owner must return the policy with a written request. The refund covers premium, fees, and other charges. Industrial life is excluded. Don't confuse it with the 12-day refund in the disclosure rules.

Review: Use the right percentage and keep the other triggers

• The six ways an old policy can be replaced

Review: Carry out the agent's notice duties

• Who does what: agent-sold replacements
• What the replacement notice says, and where comparisons fit