What Is Twisting and Churning in Insurance?

The insurance industry relies on trust, with consumers depending on professionals for sound advice and appropriate coverage. However, certain practices, like twisting and churning, undermine this trust. These activities involve manipulating policyholders into unnecessary coverage changes, often harming the client for the agent’s financial gain. Understanding these practices helps consumers protect their financial well-being and ensure they receive suitable coverage.

Understanding Twisting

Twisting in insurance involves an agent inducing a policyholder to surrender or lapse an existing policy to purchase a new one, typically from a different insurance company. This practice uses misleading information, false comparisons, or incomplete disclosures about the terms and benefits of both policies. The agent’s motivation is often to earn new commissions, which are usually higher on new policy sales.

Twisting includes misrepresenting the coverage, premiums, or cash values of the existing policy, or exaggerating the new policy’s benefits. An agent might falsely claim an existing policy is expiring or suggest an “update” that is actually a new policy. For instance, an agent might persuade a client to replace a whole life policy with significant cash value, claiming it’s outdated, even if it offers guaranteed rates. They might highlight lower initial premiums or flexible terms of a new universal life policy from a different insurer, without explaining future cost increases, surrender charges, or loss of favorable features. This deception can lead to a client losing accumulated benefits and paying more for inferior coverage.

Understanding Churning

Churning in insurance is a deceptive practice where an agent persuades a policyholder to replace an existing policy with a new one, usually within the same insurance company. This often involves using the cash value from the existing policy to pay for the new policy’s premiums, primarily to generate new commissions for the agent. Churning frequently occurs with permanent life insurance policies, such as whole life or universal life, which accrue cash value.

Churning involves excessive transactions or frequent policy replacements that do not serve the policyholder’s financial interests. An agent might encourage a policyholder to take a loan or withdrawal from their current policy’s cash value to fund the first year’s premium of a new policy, claiming it is a beneficial “restructuring.” For example, a policyholder with an established universal life policy might be convinced to surrender it and purchase a new one from the same insurer. The agent might suggest new features, but the main effect is a new upfront commission for the agent, while the policyholder incurs new surrender charges and potentially higher long-term costs. This practice can deplete the original policy’s cash value and create a new policy with reduced benefits or increased expenses.

Consumer Harm from Unethical Practices

Twisting and churning harm policyholders by eroding their financial stability and compromising their insurance coverage. A direct consequence is the loss of accumulated cash value in policies held for many years. When an existing policy is surrendered, any cash value built up may be subject to surrender charges, resulting in a direct financial loss. New policies acquired through these unethical means often have higher premiums for similar or reduced coverage, especially for life insurance, due to the policyholder’s increased age.

Policyholders can also lose valuable policy features, such as grandfathered rates or guaranteed insurability clauses. There can be a period of reduced or no coverage during the transition, leaving the policyholder vulnerable. These practices prioritize the agent’s commission over the policyholder’s long-term financial security. The policyholder pays more, receives less, and may face unforeseen tax liabilities or a complete loss of principal investment.

Regulatory Oversight and Enforcement

State insurance departments oversee insurance sales practices and enforce regulations to protect consumers. Each state’s insurance department licenses companies and agents, approves policies, and ensures compliance with state laws. Twisting and churning are prohibited by state insurance laws and regulations across the United States. These regulatory bodies investigate consumer complaints and conduct market conduct examinations to identify misconduct.

When agents are found guilty of twisting or churning, regulators can impose disciplinary actions. These may include financial penalties against the agent or agency. In severe cases, agents may face suspension of their insurance license. The most severe consequence for repeat offenders or egregious violations is permanent license revocation. State insurance departments also collaborate with other agencies and provide guidance to insurers on preventing these practices, such as requiring specific disclosures during policy replacements.

Steps to Take if You Suspect Misconduct

If you suspect you have been a victim of twisting or churning, review all policy documents for both your old and new insurance policies. Compare the terms, premiums, cash values, and surrender charges to identify discrepancies or misrepresentations. This review helps clarify if the replacement policy offers the promised benefits.

After reviewing documents, contact your insurance company directly for clarification on policy changes. If your concerns are not addressed, file a formal complaint with your state’s Department of Insurance or equivalent regulatory body. Their contact information, including phone numbers, online submission forms, or mailing addresses, is typically on their official websites. Providing all relevant documentation and a clear narrative will assist their investigation.