What Is Churning in Life Insurance?

Life insurance churning is a deceptive practice where an insurance agent encourages a policyholder to replace an existing life insurance policy with a new one without genuine benefit. This often occurs even when the new policy offers similar or inferior coverage. The core issue is that the replacement is driven by the agent’s financial gain rather than the client’s best interests. This unethical activity can lead to various negative outcomes for the policyholder, including financial losses and reduced coverage.

Understanding Life Insurance Churning

Life insurance churning involves an agent persuading a policyholder to surrender an existing policy and purchase a new one, often from the same insurance carrier. This practice is considered unethical and illegal because it primarily benefits the agent through new commissions, rather than providing a meaningful advantage to the policyholder. Agents typically earn a substantial portion of the first year’s premium as commission, sometimes more than 100%, while trailing commissions in subsequent years are significantly lower. This commission structure creates a strong incentive for agents to encourage policy replacements, even when unnecessary.

Policyholders can suffer various negative consequences from churning. These include higher premiums for comparable or worse benefits, the imposition of new surrender charges, and the loss of accumulated cash value or policy benefits from the old policy. Replacing a policy also restarts the contestability period, typically two years, during which the insurer can deny a claim based on misrepresentations on the application. A new suicide exclusion period also begins, meaning the policyholder might lose the protection built up over years with their original policy.

Common Methods of Churning

Agents employ specific tactics to execute churning, often misleading policyholders about the true implications of replacing their existing coverage. One common method involves using the cash value from an existing permanent life insurance policy to fund the premiums of a new policy. An agent might advise the policyholder to take a loan against the cash value or surrender the old policy entirely, then use these funds to pay for the initial premiums of a new policy. This can deplete the savings built up in the original policy and may even create a taxable event if the policy is surrendered for more than the premiums paid.

Another tactic involves misrepresenting the benefits or features of the new policy, making it appear more advantageous than the existing one. For instance, an agent might claim the new policy offers “better” coverage or “lower” costs without fully disclosing that the benefits are similar or inferior, or that the overall cost over time will be higher due to new fees and charges. Policyholders might be pressured to switch to a new policy with similar or inferior benefits at a higher cost, or without any clear financial advantage. This often entails downplaying the value and features of the current policy while exaggerating the benefits of the proposed new one.

Agents may also pressure clients into making quick decisions, providing incomplete or misleading comparisons between the old and new policies. They might omit crucial details about surrender charges, the restarting of waiting periods, or the loss of favorable terms from an older policy. The agent’s primary motivation is to generate a new commission from the sale of the replacement policy.

Recognizing Potential Churning

Policyholders can identify potential churning by looking for several observable signs and red flags. An unexpected call or proposal from an agent suggesting you replace your existing policy without a clear, documented change in your financial circumstances or needs should raise suspicion. Agents who pressure you to make a quick decision or discourage you from thoroughly reviewing the details of the proposed new policy are also red flags.

Another indicator is a new policy that offers no clear financial advantage, such as higher premiums for the same or reduced coverage, or a new policy that requires a new medical exam and restarts waiting periods for benefits. If the agent cannot clearly explain how the new policy significantly improves your financial position or coverage, or if they avoid providing a side-by-side comparison of your current and proposed policies, you should specifically ask about any new surrender charges, the impact on your policy’s cash value, and how the new policy’s contestability period compares to your existing one. Policy applications for a new policy typically ask if you have existing life insurance and if you plan to replace it, which triggers specific disclosure requirements.

Actions for Suspected Churning

If you suspect you have been a victim of life insurance churning, begin by gathering all relevant documentation related to both your old and new policies. This includes policy numbers, the agent’s name, dates of interactions, and any illustrations or comparison statements you received.

Next, contact your original insurance company’s customer service or consumer affairs department. Explain your concerns and provide them with the details you have gathered. They can investigate whether the replacement procedures were properly followed and whether the agent adhered to ethical guidelines. Many states adopt the National Association of Insurance Commissioners (NAIC) model regulations, which require specific disclosures and procedures for policy replacements to protect consumers.

You should also contact your state’s Department of Insurance or Insurance Commissioner. These regulatory bodies oversee insurance practices and investigate consumer complaints against agents and insurers. They can provide guidance on your rights and the process for filing a formal complaint. Additionally, consider consulting an independent financial advisor or an attorney specializing in insurance law, as they can offer unbiased advice and help assess the financial impact of the churning on your situation.