What Is Twisting in Life Insurance?

Twisting in life insurance refers to an unethical and illegal practice where an insurance agent persuades a policyholder to replace an existing life insurance policy with a new one. This often occurs through misleading statements or incomplete comparisons, ultimately harming the policyholder by leading to financial disadvantages and reduced coverage.

Understanding Twisting

Twisting is defined as inducing a policy owner to lapse, forfeit, or surrender an existing life insurance policy to purchase a new one, often driven by the agent’s desire for higher commissions. For an action to be considered twisting, it must involve deception or misrepresentation and result in detriment to the policyholder, such as higher premiums, new waiting periods, surrender charges, or loss of cash value or favorable policy features.

Identifying Twisting Tactics

Agents engaging in twisting employ various deceptive tactics to convince policyholders to switch policies. One common method involves misrepresenting the terms, conditions, or benefits of the existing policy, making it seem less favorable than it is. Conversely, they might exaggerate the benefits or features of the proposed new policy, painting an overly optimistic picture. Another tactic is the failure to disclose important financial implications associated with the new policy, such as surrender charges from the old policy or new waiting periods before coverage becomes fully effective. Agents might also suggest using the accumulated cash value from an existing policy to fund a new one without fully explaining the tax implications or the loss of that cash value. Additionally, policyholders might experience pressure to make quick decisions, without adequate time to review and compare policy details.

Impact on Policyholders

Falling victim to twisting can lead to several adverse financial and coverage-related consequences for policyholders. A primary financial loss often stems from surrender charges imposed when an existing policy is canceled prematurely. Policyholders may also lose accumulated cash value or face unforeseen tax liabilities on withdrawn funds, negating any perceived premium savings from the new policy. Beyond financial costs, policyholders can lose valuable “grandfathered” policy features, such as lower original premium rates or more favorable underwriting terms secured when they were younger or healthier. A new policy typically imposes a new contestability period, usually one to two years, during which the insurer can deny claims if misrepresentations are discovered on the application. New waiting periods for certain benefits, like those for specific health conditions, can also leave policyholders temporarily without coverage.

Regulatory Oversight

Twisting is a violation of state insurance laws across the United States. State insurance departments are the primary regulatory bodies responsible for overseeing the insurance industry and investigating complaints. Agents found guilty face significant penalties, including fines, license suspension or revocation, and potentially criminal charges. Policyholders who suspect twisting should report it to their state’s insurance department for investigation and enforcement.