Insurance 101: Churning and Twisting
November 3, 2021
Life insurance and annuities products, often sold through life lines of authority, are frequently evolving, changing benefits, adding options like riders or features that make them more versatile. So it’s no wonder that producers may want to help their clients change contracts, exchanging one product for another that might better suit their needs.
Yet, there are also several selfish reasons a producer might want a client to swap a product. Reasons like:
To keep a lid on activities that exploit consumers for producer profit, states have laws to discourage what is called “churning” or “twisting” contracts. Not all regulations are created equal, of course, and so, while the industry can, on the whole, agree that churning is unethical, in practice, there are few regulatory checks that clearly push back against the practice.
As you read, bear in mind that this is an online article, and, while we’re surfacing information to elevate the dialogue and prompt some considerations in the industry, we’re not offering legal advice. Reading our colloquial and hip posts might inform your perspective, but it isn’t a replacement for doing your own due diligence.
Why replace a life insurance or annuity contract?
Part of the difficulty in regulating contract churning or insurance twisting is because there are several truly valid reasons to replace a contract. For instance, contract options like riders and cash-value accumulation have come a long way in the last decade. If someone purchased an annuity contract previously and now wants a contract with a long-term care rider, or if a permanent life insurance contract could be upgraded to one with better contract accumulation options, swapping contracts is a no-brainer.
Insurance carriers sometimes make this easy, with many contracts allowing the policyholder to withdraw their contract value penalty-free about ten years from the initial contract implementation. Even for those who may face penalties, carriers often allow for upfront bonuses that offset lost value from early contract transfers.
Of course, those bonuses sometimes represent their own inducement for a move. All other things being equal, if a consumer is beyond a 10-year surrender period, why not move contracts and scoop up an extra few thousand dollars of value?
Carriers might also encourage or discourage certain policies based on the risks they are already underwriting. With the exodus from long-term care insurance, for instance, carriers were often faced with the prospect of either significantly raising rates on policyholders or terminating contracts altogether. By extending other life insurance or annuity products with long-term care benefit riders, sometimes they could satisfy the needs or concerns of clients without placing the client or the carrier in a precarious economic position.
Why not replace an insurance contract?
Innovations in the marketplace and changes in a client’s life circumstances are often totally valid reasons for contract exchanges. Unfortunately, there are sometimes more opaque reasons, as well.
A life insurance producer’s biggest payout for an insurance contract is in its first year. More contracts = more money. The commission on most life insurance policies, particularly permanent life insurance or annuities, is about 50 to 90 percent of whatever the premium payments are in year one, with the producer taking home around 70 percent of that and typically 20 or 30 percent going to whatever agency, wholesaler, or insurance marketing organization negotiated the paper between the agent and the carrier. The remaining commission will be paid out annually on contract renewal.
The percent breakdowns here are just typical averages; each contract has its own particularities. The point is that one (bad) reason a producer might recommend a contract swap is so an older contract becomes a new contract that will net the producer a big commission. The motive here is straight profit – getting the big upfront commission is a quick way to put money in the bank.
Another dubious reason to turn a contract is when an insurance producer changes agencies. While the biggest commission from a contract comes in year one, many contracts have trailing commissions that continue to pay out to producers for years to come. However, if a producer decides to change the agency they are with, they may be forced to forfeit that trailing commission. Obviously in this case, again, the profit incentive is at issue.
Sometimes these contracts represent just names on paper to the producers. Other times, though, life insurance and annuity producers see contract holders as important relationships, people they have formed for weeks or years, people whose financial lives are deeply intertwined with the producer’s practice. These are the ones that represent the trickiest cases to disentangle incentives. In these cases, if a producer leaves an agency, or even if that producer is trying to bring on a client and “convert” them from a competing producer, there may be the temptation to offer a similar contract, where the only substantial difference is the producer who will earn the commission.
Churning and twisting: What are they?
Churning in insurance is when a producer replaces a client’s coverage with one from the same carrier that has similar or worse benefits. Twisting is a replacement contract with similar or worse benefits from a different carrier.
Both churning and twisting assume scenarios where the coverage may be slightly different, but the overall parameters are the same. Few people would consider it suspicious if a client asked for a new contract to reflect different priorities for long-term care, or to adopt extra spousal benefits. But if a producer changed agencies and spontaneously called a client, hoping to help them into an annuity with a minimally different cap/spread, that might raise a few eyebrows.
What if the client really wants that different cap/spread product, though? What if the new contract really is in their best interests? What if they decided the carrier wasn’t delivering on the kind of customer service they expected? What if the producer was doing their due diligence to alert the client to new considerations that will affect their future benefits?
The subjectivity of what constitutes a client’s interests, and how far a producer should have to go to satisfy them, is a post for a different day. But suffice to say, the reason there are so few hard and fast regulations against churning is because of exactly these kinds of gray-area questions. Contract particulars vary so much that it’s hard to pin down exactly what is a superior or inferior contract.
However, regulations across the states address contract turnover in a particular way. Read on to part two to find out how regulations apply to churning and twisting, and best practices for insurers to tackle this problem on the front lines.
And, for the carriers, MGAs, and agencies tasked with tracking producers and their sales activity, find out how AgentSync can marry your growth, your compliance, and a seamless producer experience.