Date:September 29, 2009
To:All Insurers Authorized to Write Life Insurance in Wisconsin
From:Sean Dilweg, Commissioner of Insurance
Subject:Section Ins 2.07, Wis. Adm. Code, relating to replacement of life insurance or annuity contracts; disclosure requirements

The purpose of this memorandum is to summarize the repeal and recreation of s. Ins 2.07, Wis. Adm. Code, which became effective on July 1, 2009, and applies to life insurance and annuity solicitations beginning on November 1, 2009. The amended rule establishes minimum standards of conduct to be observed by insurers and producers in life insurance and annuity replacement or financed purchase transactions to ensure disclosure of material information to purchasers and to reduce opportunities for misrepresentation and unfair business practices. The rule expands and clarifies the information that must be communicated by a producer to a purchaser at the time an application is completed and provides disclosure notice formats to ensure uniformity. The rule is based upon a model regulation adopted and recommended by the National Association of Insurance Commissioners (NAIC).

You should carefully review the amended replacement rule and this memorandum to understand how the changes apply to your company. It is each insurer's responsibility to ensure that its free-look notices, replacement notices, and related procedures are in compliance with the new regulation.

Section Ins 2.07 (2), Scope

The regulation includes a number of modified or new exclusions not previously included in the prior replacement rule that insurers should review. Among them, the rule does not apply to transactions involving group life insurance and annuities used to fund prearranged funeral contracts, proposed life insurance to replace coverage under a binding or conditional receipt issued by the same insurer, new coverage where the cost is borne wholly by the insured's employer or by an association of which the insured is a member, an existing non-convertible and non-renewable term life insurance policy that will expire in 5 years or less from the date of issue, immediate annuities that are purchased with proceeds from an existing annuity contract, and structured settlements.

Section Ins 2.07 (3), Definitions

Insurers should carefully review a number of new definitions in the regulation that were not previously included in the prior replacement rule. Especially important are the new definition of "financed purchase" and the reworded definition of "replacement."

Section Ins 2.07 (4), Duties of Producers

The new regulation requires a producer to submit to an insurer, with or as part of each application, a statement signed by both the applicant and the producer as to whether the applicant has an existing individual life insurance policy or annuity contract in force, including a policy under a binding or conditional receipt or a policy or contract that is within an unconditional refund period.

The prior replacement regulation required a producer to provide the applicant a replacement notice only when the transaction involved replacement. The new rule now requires the producer, if the applicant answers "yes" to the question regarding having existing coverage, to present and read aloud to the applicant the notice regarding replacement, unless the applicant chooses it not to be read. If the replacement questions in the notice are answered "yes," the notice must list each life insurance policy or annuity contract proposed to be replaced or used in a financed purchase. The notice must be signed by both the applicant and the producer. A copy of the notice must be left with the applicant, and a copy must be submitted to the insurer with the new application for coverage.

If replacement is involved, a producer must leave with the applicant, at the time the application is completed, the original or copy of all illustrations and other sales material used during the sales presentation. If electronically presented sales material was used, a printed copy of the material must be provided to the policy or contract holder no later than at the time the policy or contract is delivered. A producer is also required to submit to the replacing insurer a statement identifying any company-approved sales material that was used during the sales presentation, as well as copies of any individualized sales material and illustrations that were used. However, If an insurer requires its producers to use only company-approved sales material, the insurer may, as an alternative, require with each application a statement signed by the producer that he/she used only company-approved sales material, rather than a statement identifying the company-approved sales material that was used.

Section Ins 2.07 (5), Duties of Insurers that Use Producers

Insurers are required to obtain with or as a part of each application for life insurance or an annuity the signed statements and replacement notices as required in this rule. If an application does not meet the requirements of this rule, insurers are required to notify the producer and applicant to fulfill the outstanding requirements.

Insurers are also required to establish and maintain a system of supervision and control to ensure compliance with this rule that, at a minimum:

  • informs producers of the requirements of this rule and incorporates the requirements into relevant producer training materials,
  • provides to each producer a written statement of the insurer's position on the acceptability and written guidance regarding the appropriateness of replacement transactions,
  • reviews the appropriateness of each replacement transaction that the producer does not indicate is in accordance with the insurer's position on replacements,
  • confirms that the requirements of this rule have been met,
  • establishes procedures to detect transactions that are replacement transactions, but have not been reported as such by the applicant or producer,
  • may include systematic customer surveys, interviews, confirmation letters, or other forms of internal monitoring.

The new rule requires insurers to monitor and keep specific records concerning their producers' replacement transactions and make such records available to the commissioner upon request.

When an applicant has existing policies or contracts, insurers are required to maintain and make available to the commissioner upon request any sales material required by sub. (4) (e) of this rule, any illustrations related to the policy or contract that is purchased, and the producer's and applicant's signed statements with respect to replacement for at least 5 years after the termination or expiration of the proposed policy or contract. Records may be maintained by any process that accurately reproduces the actual document.

Section Ins 2.07 (6), Duties of Replacing Insurers that Use Producers

When replacement is involved in a transaction, the replacing insurer is required to:

  • verify that the required forms are received with the application and in compliance with this rule,
  • notify the existing insurer of the replacement within 5 business days of receiving a completed application indicating replacement or when replacement is identified if not indicated on the application, and mail a copy of the available illustration, policy summary, or disclosure document for the proposed policy or contract within 5 business days of a request from the existing insurer,
  • be able to produce copies of replacement notices, indexed by producer, for at least 5 years or until conclusion of the insurer's next regular examination conducted by the insurance department of its state of domicile, whichever is later,
  • provide to the policy or contract owner notice of the right to return the policy or contract within 30 days of delivery of the policy or contract (previous rule required a 20-day free-look) and receive a full refund of all premiums or considerations paid, including any policy fees or charges, or, in the case of a variable or market value adjustment policy or contract, a payment of the cash surrender value plus the fees and other charges deducted from the gross premiums or considerations or imposed under the policy or contract.

In transactions where the replacing insurer and the existing insurer are the same or subsidiaries or affiliates under common ownership or control, the replacing insurer is required to give credit for the period of time that has elapsed under the replaced policy's or contract's incontestability and suicide period up to the face amount of the existing policy or contract. For financed purchases, the credit may be limited to the amount the face amount of the existing policy is reduced by the use of existing policy values to fund the new policy or contract.

If an insurer requires its producers to use only company-approved sales material, the insurer may, as an alternative, require with each application a statement signed by the producer that he/she used only company-approved sales material, rather than a statement identifying the company-approved sales material that was used. However, if this alternative is chosen, an insurer is required, within 10 days of the issuance of the policy or contract, to have a company representative whose duties are separate from the marketing area of the insurer, write or verbally contact the applicant to notify the applicant that the producer has represented that he/she left copies of all sales material with the applicant, stress the importance of retaining copies of the sales material for future reference, and provide the applicant with a toll-free number to contact the company representative if the producer did not leave the sales material with the applicant. Insurers are required to maintain a copy of the letter that was sent to the applicant or documentation of verbal communication with the applicant in the policy file for at least 5 years after the termination or expiration of the policy or contract.

Section Ins 2.07 (7), Duties of the Existing Insurer

Within 5 business days of receiving a notice that a policy or contract is being replaced, an insurer is required to send a letter informing its policyholder or contract owner of the right to receive information regarding his/her existing policy or contract values. The information concerning policy or contract values must include an in-force illustration or a policy summary if an in-force illustration cannot be produced and must be provided within 5 business days of receiving a request from the policy or contract owner.

An insurer, upon receiving a request to borrow, surrender or withdraw any policy values, is required to send a notice advising the policyholder or contract owner that the release of policy values may affect the guaranteed and non-guaranteed elements, face amount or surrender value of the policy. The notice must be sent separately from the check if the check is sent to anyone other than the policy owner. In the case of consecutive automatic premium loans, the insurer is only required to send the notice at the time of the first loan.

An insurer is required to retain all replacement notifications it receives, indexed by replacing insurer, for at least 5 years or until the conclusion of the next regular examination conducted by the insurance department of its state of domicile, whichever is later.

Section Ins 2.08 (8), Duties of Insurers with Respect to Direct Response Solicitations

In direct response solicitations, an insurer is required to obtain, with or as part of the completed application, a statement as to whether the applicant intends to replace an existing policy or contract. If the applicant indicates that replacement or change is not intended or if the applicant fails to respond, an insurer is required to send, with the issued policy or contract, a notice regarding replacements as specified in the rule. If the applicant indicates that replacement or change is intended, an insurer is required to send, with the issued policy or contract, a replacement notice requiring the applicant's signature, as specified in the rule. An insurer is deemed to have made a diligent effort to secure a signed copy of the replacement notice if it includes in the mailing a self-addressed postage prepaid envelope with instructions for the return of the signed notice.

Section Ins 2.07 (9), Violation

A pattern of transactions where policy and contract owners of the same producer subsequently replace existing life insurance policies or annuity contracts after indicating in their applications that replacement was not their intention will be considered evidence that the producer had knowledge of the replacements and intended to violate this regulation.

Rule Appendices I, II, and III

Insurers may make minor changes to the replacement notices described in the rule's appendices if approved by the commissioner. No approval is required when modifications are limited to deletion of references to the producer in direct response solicitations including the producer's signature line and references not applicable to the product being sold or replaced. Insurers using SERFF may submit modified notices to the OCI for approval using the filing type "Life Replacement Notice" when submitting the filing.

* * * * *

This memorandum is a summary of the new life insurance and annuity replacement regulation. A copy of the full text of the rule, including appendices containing the required replacement notices, can be obtained from the Web site at: http://oci.wi.gov/ocirules.htm or by contacting Inger Williams, Public Information and Communications, at:

Phone:(608) 264-8110
E-mail:inger.williams@wisconsin.gov
Address:125 South Webster St., 2nd Floor, Madison WI 53703
Mail:P.O. Box 7873, Madison, WI 53707-7873


Questions concerning the requirements of s. Ins 2.07 can be e-mailed to:

Mike Honeck
Chief of Health & Life Section
mike.honeck@wisconsin.gov