Life Insurance-Churning

teresavaJanuary 17, 2004

I have some serious questions about Churning/Twisting, as I believe this is what's happened to me and my family. What kind of options do I have now? Can anyone help me with this? I need to talk to someone informed that I can trust, and it is obviously not my agent. Even if you can just point me in the right direction as I am lost now.



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We can't be of much help until you tell us what's going on.

joyful guy/Ed

    Bookmark   January 18, 2004 at 3:21AM
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I believe my agent has been "churning" our life insurance policies. It's a type of scam in the insurance world-anyone familiar with life insurance will know what this is. I need to know what kind of recourse I can have against him now or what my options are??

    Bookmark   January 19, 2004 at 9:16AM
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Please educate the rest of us! What is churning?


    Bookmark   January 19, 2004 at 10:37AM
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Here's what I found at about churning or twisting.

"A rash of policyholder complaints about misleading sales practices has fueled a growing number of class action suits against life insurance companies. The offending practices usually take one of two forms: "churning" (also known as "twisting") or promises of "vanishing premiums."
Churning and twisting

Once a policyholder has been paying into a whole life insurance policy for some time, its cash value builds up, making the policy more valuable. Some unscrupulous life insurance agents then convince their customers to use the built-up cash value of their existing policies to buy a "new, improved" policy one with more coverage, different features, or a different payment schedule.

What these agents neglect to tell their customers is their existing policies are usually quite adequate for their needs, and when they use the built-up cash value to purchase a new policy, they start from square one in building up cash value in the new policy. This practice is called Âchurning or Âtwisting. It's unethical  and illegal. Some agents churn because they earn a commission for each new policy they sell.

The fallout from churning isn't immediately apparent. A customer doesn't have to shell out any money up front because the built-up cash value of the existing policy pays the initial premiums of the new one. Once you use the cash value; however, it's gone.

Texas insurance commissioner Jose Montemayor says Âchurning profits insurance agents at your expense. ÂIf you bought the original policy at an earlier age, the new policy might cost more and offer less coverage. In addition, if you should die during the first two years of a new policy, the insurance company can contest claims for the death benefits, Montemayor warns. ÂMany companies pay larger commissions to agents for new policies than for renewals.Â

A policy's cash value is actual money the policyholder owns, although usually just on paper. Cash value can be used as security for a loan or converted into an annuity. If a policyholder decides to cancel a life insurance policy with built-up cash value, he's entitled to that money, minus the surrender charge."
An example of ÂchurningÂ

In the past 15 years, Joe has built up a substantial amount of cash value in his whole life insurance policy. His old agent retires.

The new agent calls Joe, offering to sell him a policy with a larger death benefit. The agent tells Joe he can buy the new policy at no additional cost. What Joe doesn't understand is by switching to a new policy, he is using up the cash value of the old policy  money he could have used to address many financial needs.

By replacing the policy, it will take him longer to build up that cash value. He also could have used the cash value to take out a loan from the insurance company. If he decided to cancel the policy, he would have received a check for his cash value.

State regulators say Joe was the victim of a scam. The agent never explained about the loss of cash value, despite the fact Joe was still paying the same amount in premiums.

    Bookmark   January 19, 2004 at 12:36PM
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It is my understanding that insurance companies get upset if an agent of another company sells an insurance policy and gets the client to cancel a policy with the original company. I believe that they can get the new agent into trouble for it.

In any case, it's best to get a new policy in place before cancelling an old one - just in case the new one isn't accepted by the carrier, resulting in the client possibly having no insurance at all.

It is my understanding that cash values disappear with time.

When one buys whole life insurance, the rate of premium remains the same through all the years of coverage.

When a person is young, there is little likelihood that s/he will die within the next year. So - paying a premium at a level rate, the youthful client is paying more than the actual cost of insuring her/him - so the company builds an account that consists of (part of) those overpayments over a number of years.

If you live to a ripe old age, it's my understanding that, as the actual cost of insuring you in any given year is larger than the premium rate that you're paying, the cash value of the policy reduces.

If one buys term insurance, the premium rates in the earlier years are low, as risk of death within that year is low. As the years pass and the client gets older, premium rates on the same level of coverage increase, as the possibility of death during those years increases.

On the other hand, as one ages, the need for life insurance decreases: children are growing and getting nearer the time when they will be independent, and a number of wives can choose go out to work when the children are grown, so need a lower amount of asset in order to live comfortably. Also - she'll have fewer years yet to live.

On the other hand, if the client has invested much of the difference between the low price of term insurance and the high price of whole life insurance in the earlier years, those invested amounts will have been growing and will help to provide for the family's needs should the income earned by the employed person disappear.


joyful guy/Ed

    Bookmark   January 20, 2004 at 1:39AM
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It happens. We were churned by our life insurance agent back when we were too naive to know better. The state licensing agency brought an action against him and he eventually lost his license.

    Bookmark   January 20, 2004 at 10:27AM
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I am a 28 year veteran to the financial services field, including insurance. Churning/twisting, although illegal and unethical, is just as much a subjective and perceptive activity as the actual intent of the illegal act. If you feel as though you have been taken, my suggestion is to ask someone who is "very" familiar with the insurance business and the steps that the agent "should" have taken before making the sale; and, then you can make a pretty accurate determination as to whether the agent's intent was illegal, ignorance driven, or whatever. I hope this helps. The articles that were posted on this site are fairly narrow in scope and from one main source - insufficient from my perspective to make a determination.


    Bookmark   October 30, 2007 at 8:15PM
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>>If one buys term insurance, the premium rates in the earlier years are low, as risk of death within that year is low. As the years pass and the client gets older, premium rates on the same level of coverage increase, as the possibility of death during those years increases. This is only true with standard term policies. If you get what is called "Level Term" policies, you buy them for a specific period of years. You can choose from 10, 15, 20, 25, and 30 yr terms. The premiums are level throughout that period. They then increase substantially after that period, at which point it's usually best to cancel the insurance.

For instance, I purchased 15 yr level term insurance when I was 50. I'll let the policy lapse when I'm 65 as my expectation is that I will no longer be needing the policy. Until then, my premiums remain the same as when I first bought the policy.

Cash value life insurance usually isn't adequate protection considering the cost of it. I don't expect my auto or homeowner's insurance to rebate any money to me. I'd rather pay the least amount of money for larger amounts of insurance for a specific period for which I need protection. The 15 yr level term policy is for $500K and costs only $56/mo on a Standard (not Preferred) rating, from a reputable carrier.

Once you're retired, have paid off your mortgage, or reach your seventies, your need for insurance is pretty minimal. Conversely, if you are married, have young children, have a mortgage, not a lot of retirement savings - you should be insured for at least 7x-10x your annual gross income - each parent!

    Bookmark   October 30, 2007 at 10:19PM
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Hi Teresa,

Even if you can just point me in the right direction as I am lost now.

People to call, in order;
A) Your state office of insurance commissioner,
B) Your state department of financial institutions,
C) Your state department of consumer affairs,
D) Your state office of attorney general,
E) The federal Fair Trade Commission,

Following that path of inquiry, you ought to definitely have all of your answers covered, and if you require defense or assistance you ought to have it provided.

Good luck!
Dave Donhoff
Strategic Equity & Mortgage Planner

    Bookmark   November 4, 2007 at 5:53PM
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