Churning is a term used to describe the method of stirring cream or whole milk in order to make butter. This expression is used in many businesses, but when talking about the insurance industry, it means doing something illegal. Sometimes it can also be referred to as twisting. 

what in life insurance means churning or twisting

Churning happens when an insurance specialist replaces a policyholder's insurance contract with another insurance contract, usually without speaking to the policyholder and frequently without any benefits for the contract in question. Those who engage in such practices usually do it to get an extra commission for the “new” policy that they bring in.

Churning to expand profit is an unlawful practice if you engage in it without the client's consent and if it brings no advantages for the insured person.

Why would your agent do something like that? Well, I can’t think of any other reason than the most obvious one - COMMISSION

commission is why insurers practice churning

As we grow older, our life situation is changing in terms of marital status, employment status, family status, and so on, so it makes sense for our life insurance policy to grow with us as well. When we decide to update the policy, so it can better suit our needs, it makes sense that our agent gets his commission for all the work he or she did on our request. But the problem occurs when an agent decides on these changes without our approval and without ensuring this also benefits us.  

To bring an end to such practices that exploit customers for the companies’ or personal benefit, the government has regulations in place to discourage them from what is called "churning" or "twisting" contracts. Not all guidelines are equally important, obviously. Thus, while the business can, in general, agree with the fact that churning is dishonest, there are not many regulatory checks that would bring this practice to an end.

twisting in life insurance must stop
Both twisting and churning usually happen in scenarios where the terms of contracts might be somewhat different, yet the general limits are practically the same. Not many people would suspect something is at play if a client requested another contract that might be more in line with their long term care plans, or in order to add some benefits for their spouse.

However, it would seem a bit unusual if an insurance agent changed agencies and then decided to call up a client unexpectedly, trying to convince them to take on an annuity with very little difference in the cap/spread. 

The subjectivity of the term “a client's interests” and how far an insurance provider ought to go to fulfil the customer’s wishes could be an entirely separate blog post. But this is exactly why there are very few and also badly structured regulations against churning. Namely, these are questions where the answer is not just a simple, black-and-white thing. Especially since particulars in a contract can change so often that it is difficult to figure out sometimes what the superior or inferior contract is. 

churning is ilegal and insurer agents know that

Churning scams can sometimes also be more complicated than just purchasing a new policy to create more commissions. Under certain circumstances, the insurance agents set up the contract in a way that makes their clients lose their money. Namely, an agent sells policies, and representatives and middlemen take various commissions through a progression of reinsurance arrangements. Charges turn out to be diminished by these rehashed commission instalments, and there is no cash left over for claims to be paid to policyholders.

Written by: James Webb

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