Understanding Life Insurance Churning and Twisting: Protect Yourself from Unethical Practices

• November 21, 2024
• Life Insurance

Life insurance can insulate your loved ones from unexpected expenses arising from a sudden accident, illness, or injury. In the event that you are unable to provide for them, life insurance policies help loved ones with reimbursement for medical and final expenses, as well as provide a financial cushion after a loss. However, life insurance churning and twisting scams can defraud families out of thousands in savings. They can even result in a total loss of death benefits, leaving a lingering trail of financial destruction in their wake.

Life insurance fraud can easily occur when a financial advisor breaks the trust you have placed in them. Protect yourself and your family from life insurance scams by learning how to spot churning and twisting.

What is Twisting and Churning in Insurance?

According to a survey from the Reinsurance Group of America (RGA), financial misrepresentation and churning/twisting rank numbers four and five respectively as the most concerning and common kinds of fraud in the insurance industry. Twisting in insurance is when a policyholder is convinced to replace their existing policy with a new one from the same company. This serves the client no purpose other than to generate additional commission revenue for the financial advisor who recommends the switch.

Churning is very similar and involves the same motivation for the financial professional. It only benefits their own interests, and not the client, who may be harmed by the change. In churning, a policyholder is convinced to needlessly replace their existing policy with a new one from a different company.

Why Do Financial Advisors Twist and Churn in Life Insurance?

Churning and twisting are two of the most common ways that financial professionals attempt to turn a quick buck by convincing you to reinvest your life insurance policy. There is a significant profit motive involved in your financial advisor’s recommendations for your portfolio. Your financial advisor can earn themselves a high percentage of the first year’s premium, in some cases more than 100%, by convincing you as the client to invest in a certain policy. However, trailing commissions in the subsequent years are significantly lower. When financial advisors can convince clients to change policies unnecessarily, they can boost their own commissions back to the higher first-year rate, at the expense of their client’s best interests.

What Are the Consequences of Twisting and Churning for an Insured?

The cost of life insurance scams is higher than you might realize. Switching policies needlessly can come back to haunt you at some of the worst moments, when you need coverage the most. Consequences of twisting and churning include:

• Higher premiums
• Worse benefits
• Loss of benefits
• Disruption in coverage
• Lingering debt
• Unforeseen tax liabilities

Take the real-world example of the Tremblays, an older couple who were scammed out of at least $18.3 million by being convinced to roll over existing annuities, or use cash, to buy new annuities in Allianz Life Insurance Co. of Minneapolis. The broker misrepresented the situation to the Tremblays, claiming that Allianz annuities offered better rates and features than their older policy. He also told them that investing could earn them bonuses to cover the surrender charges and fees they would incur from switching. Instead, the Tremblays ended up owing $358,427 in taxes, borrowing approximately $1 million in order to finance policies with lower cash surrender values than their existing holdings, and immediately lost $50,000 by purchasing a policy that they did not qualify for. This pattern of fraud robbed the Tremblays of an enormous amount of savings and cost them millions in potential market profits.

How to Protect Yourself Against Life Insurance Twisting and Churning

Out of the various types of life insurance policies available, financial advisors often recommend permanent insurance because of the more lucrative commission structure on their end. Term life insurance provides fixed coverage for a set period of time. Once that period passes, an insurance company no longer must pay benefits after the policyholder’s death. On the other hand, permanent life insurance encompasses whole life insurance as well as variable universal life insurance (VUL) and universal life insurance (UL). These policies appreciate in cash value and can grow tax-deferred based on premium payments made by the insured.

These more complex financial products are not appropriate for every person. For one thing, they do not generate “income” from their accrued cash value, as in order to access it, investors must take out a loan against the policy which must be repaid. When it is not repaid, the loan becomes a liability against the death benefit. This can eventually erode the policy’s value, and lead to a complete loss of principal investment as well as loss of benefits. Investment advisors commonly misrepresent the benefits of permanent life insurance policies to their clients in order to convince them to make the switch. While there are legitimate benefits to replacing a policy, doing so unnecessarily can cause significant stress and financial loss.

When in doubt, ask questions, and understand the exact reasons why you are being advised to change policies. It is not likely to benefit you to end a long-term or unit-linked contract in order to enter into a new one. The most common legitimate reason to change life insurance policies is if there has been a change in your family’s makeup or financial circumstances. If your financial agent is attempting to sell you a new policy without these reasons in play, be suspicious. Ask to read both policies side by side, and contact an investment fraud attorney if you have reason to believe your advisor is pressuring you, concealing the facts, or not being honest. All of these may be warning signs of financial advisor scams.

Speak With an Attorney if You Suspect You’ve Been the Victim of Life Insurance Fraud

Life insurance fraud cases are exceedingly common and prey upon those who are seeking to make their families more comfortable during a difficult time. You can hold your financial advisor accountable if they prioritize their own commissions over your best interests. Financial advisors have a duty to recommend only suitable products to their clients, and at times are held to a fiduciary standard. Talk to Wolper Law Firm today to understand what can be done if you suspect you have been the victim of life insurance twisting or churning. We help harmed investors recover their losses.