Replacing a Ten-Year Term Policy Eight Months Before a Death Claim

Insurer B owes a refund of premiums paid, not the $500,000 face amount.

• Dana died about nine months after issue, well inside the two-year suicide clause. A suicide clause is a valid, statutorily permitted limitation; while it runs, the insurer's exposure is limited to return of premiums (some policies add interest). The claim is denied on that ground alone.
• The material misstatement about the August 2024 cardiac stent gives Insurer B a second, independent ground while the policy is inside its two-year contestability period: the insurer may rescind the contract and refund premium. Rescission is available only because the misstatement was material to the underwriting decision and the contestability window was still open.
• Note that the two clocks both run from the February 1, 2025 issue date. A 1035 exchange or a replacement does not carry over the old policy's elapsed contestability or suicide periods.

Insurer A would have owed $500,000. Its policy was issued in 2014; both the contestability period and the suicide clause expired years earlier. By 2025 that contract paid for any cause of death, and the 2024 stent would have been irrelevant to the claim.

The cost of the replacement, therefore, is the entire $500,000 death benefit.

The suicide clause drops out, but the result for the beneficiary is the same: $0 death benefit and a refund of premium.

The claim now turns entirely on contestability:

• Insurer B is inside the two-year contestability period (Feb 2025 – Feb 2027) when the claim is filed.
• A heart attack death directly implicates the concealed August 2024 stent. That omission is material - a disclosed recent stent would have changed the offer, the rating, or produced a decline.
• Insurer B may rescind, tender the premium, and deny. If the misstatement had been immaterial, or had been disclosed and merely rated, the full face would be payable during contestability.

Contrast with Insurer A: contestability on the 2014 term policy had expired, so the insurer could not rescind even for an outright fraud in the original application - the only remaining defenses would be nonpayment of premium or a policy exclusion. The policy would have paid $500,000.

The exam point: contestability and suicide clauses are fresh clocks on a new contract. A replacement almost never improves the insured's position during the first two years and can destroy coverage the client already had.

This was almost certainly noncompliant, and the producer's "expires worthless" line is itself a problem.

Replacement duties typically triggered:

1. Notice Regarding Replacement - a signed notice, given to the applicant no later than the time the application is taken, stating that replacing existing life insurance may be disadvantageous.
2. Listing all policies to be replaced on the application or a supplemental form, including insurer name, policy number, and face amount.
3. Notice to the existing insurer - the replacing insurer must notify Insurer A within a stated period (commonly five business days) so it can contact the policyholder.
4. Comparison information - a side-by-side disclosure of premiums, cash values, and benefits lost versus gained.
5. Extended free look - replacement policies typically carry a longer free-look period than standard (commonly 30 days rather than 10).
6. No twisting - misrepresenting the existing policy to induce a lapse is a separate unfair trade practice. Calling a 20-year term policy "worthless" when it provided $500,000 of protection and a live conversion privilege is a misrepresentation of the policy's value.

What the file should have shown: the signed replacement notice, the comparison, a written rationale for the replacement, and evidence the conversion privilege in the old contract was considered. None of it protects against the suicide/misstatement outcome - but it would have exposed the producer's conduct for what it was, and a properly documented comparison is exactly what would have stopped the sale.