What Is Churning in Insurance Terms?

Churning in the insurance industry refers to a deceptive and unethical practice where an insurance agent persuades a policyholder to replace an existing insurance policy with a new one. This action is typically driven by the agent’s desire for financial gain, such as earning new commissions, rather than serving the policyholder’s best interest. It can occur with various types of insurance, but is especially common with life insurance and annuities due to their commission structures.

Understanding Churning

Churning involves replacing a policyholder’s current insurance coverage with a new policy, often from the same insurance company, that provides similar or even inferior benefits. This replacement offers little to no genuine advantage to the policyholder, primarily benefiting the agent through new commissions. An agent might encourage using the accumulated cash value from an older life insurance policy to fund the initial premiums of a new one, or simply advise canceling one policy to purchase another. Policyholders may face new fees, such as surrender charges from the old policy, or incur new acquisition costs associated with the new policy. Additionally, the new policy might have less favorable terms, such as a new contestability period or new suicide clauses that restart from its effective date, potentially reducing the overall value or benefits for the insured.

Motivations for Churning

The primary driver behind churning from an agent’s perspective is financial incentive. Agents earn substantial commissions on the sale of new insurance policies, particularly in the first year of a policy’s life. These initial commissions can sometimes exceed the total amount of the first year’s premiums. While valid reasons exist for replacing an insurance contract, such as changes in a client’s life circumstances or market innovations, churning occurs when the motivation is solely for the agent’s profit. This pursuit of new commissions can overshadow the fiduciary responsibility agents have to act in their clients’ best interests. Some agents may also be motivated by sales quotas or internal contests, further incentivizing the push for new policy sales.

Identifying Potential Churning

Recognizing the signs of potential churning helps policyholders protect their financial well-being. A significant red flag is an agent suggesting a new policy that appears very similar to an existing one, without clear, demonstrable benefits. Policyholders should be wary if an agent applies pressure for a quick decision regarding policy replacement, or discourages comparing the new policy with the old one. New policies that come with significantly higher fees, surrender charges, or require a new medical examination or underwriting process when the existing policy does not, warrant careful scrutiny. Loss of built-up cash value, dividends, or other accumulated benefits from the original policy is also a concerning indicator, especially if the new policy’s benefits do not clearly outweigh the costs and potential losses from the old policy.

Steps If You Suspect Churning

To protect your interests if you suspect churning, avoid canceling your existing policy until you are certain a new policy is beneficial and fully in force. Review all documents carefully, especially the “Notice Regarding Replacement of Life Insurance or Annuity” form, which agents are typically required to provide and outlines important considerations and rights. Contact your existing insurer directly to understand benefits, cash value, and any potential surrender charges. Seek an independent opinion from a financial advisor or another trusted insurance professional who has no financial stake in the proposed replacement. If you believe you have been a victim of churning, contact your state’s Department of Insurance or equivalent regulatory body to file a formal complaint.