Insurance industry professionals are required, in many cases by law, to always act in the best interests of their customers. Due to the nature of the financial obligations placed upon the insured by entering into an insurance contract. Insurance agents advice can have a significant impact on an insured’s financial well-being. Producers have a fiduciary responsibility to safeguard their customers’ best interests by acting ethically, especially with life insurance policies.
Life Insurance Policies Bad Apples?
This isn’t to say, however, that the insurance industry doesn’t have its share of bad apples. Although producers are duty-bound to make appropriate insurance product recommendations to their customers, their own desire to earn commissions from insurance sales presents an inherent conflict of interest. While a producer’s fiduciary responsibilities always requires valuing the customer’s interests over his own, some choose to violate the insurance professional’s code of ethics by acting deceitfully.
A practical example of ethics-gone-wrong can be found in the world of life insurance. Many who purchase life insurance utilize their policies as cash accumulation vehicles, with the intent of relying on policy proceeds later in life when they are no longer able to earn an income by working. When purchasing life insurance, it’s in your best interest to purchase a single policy and allow it to accumulate over time.
However, this plan does not always serve the interests of the life insurance producer. Every new policy sold to a customer represents an additional chance at a commission. Agents rely upon commission for their own income. This conflict of interest causes some producers to trick their customers into surrendering existing life insurance policies. They do this to generates new commissions for the themselves as agents. The insurance industry uses the terms churning and twisting to describe such deceitful practices.
Understand The Difference Between Churning And Twisting
It is important to understand the differences between churning and twisting, both of which are considered illegal practices. While both essentially constitute the same activity, they are performed under separate circumstances, and for different reasons.
Churning occurs when an insurance producer deliberately uses misrepresentations or false statements in order to convince a customer to surrender a life insurance policy in favor of a new one from the same insurer. This is usually accomplished by convincing the insured to withdraw the cash accumulated from the existing policy in order to fund the purchase of the new policy. As one might guess, this is of little benefit to the insurer; one policy is lost but another is gained, creating a net-neutral effect for the insurer. The producer, however, gains the advantage of a new commission.
Twisting is essentially the same practice, but conducted with different parties involved. Twisting occurs when an insurance producer deliberately uses misrepresentations or false statements in order to convince a customer to surrender a life insurance policy in favor of a new one from a different insurer. In this case, both the producer and the insurer stand to benefit, as business is being stolen from an industry competitor via deceitful practices.
Both Rely On deliberate Deceit
Note that both churning and twisting rely on deliberate deceit on the part of the insurance producer in question. Convincing an insured to surrender a life insurance policy in favor of a new one isn’t necessarily constitute illegal. For example, when such replacement actually is in the customer’s best interests. Accidentally convincing an insured to replace his life insurance policy cannot be hold anyone liable for churning or twisting. As this mistake was not made deliberately.
Even though such practices are usually prohibited by law, one should still be wary of churning and twisting. Treat any advice to surrender existing life insurance as a “red flag” of sorts. Unscrupulous agents can prey upon unknowledgeable customers, convincing them to drain their existing policies. They want you to purchase new ones, forcing them to start all over. Insurance consumers have the right to know how producers are compensated and commissions are earned, and must make every effort to determine that a recommended policy replacement is indeed in their best interests.