Insurance how Churning and other Questionable Advice can Cost you

The terms “churning” and “twisting” are sometimes used interchangeably. Precisely, twisting is the broader term which denotes the attempt to generate commissions by replacing policies, usually at the detriment of policyholders. This may seem straightforward enough but is actually a more complex issue than that. Some countries have this practise as unethical only. In some states, this practise is illegal. There is also a view that twisting only occurs when a replacement policy is unfavourable to the policyholder. Sometimes non-disclosure or incorrect information could make what would otherwise seem to be sound advice appear questionable. Below are some examples that I am aware of that could constitute questionable advice.

Case 1: Mr. X had an annuity with ABC Insurance Co. for three years. An agent from XYZ Insurance Co. told Mr. X that his best option would be to surrender that annuity and take the better option that XYZ offered. The rationale was that ABC offered better rates and more stability. Mr. X was not made aware that the annuity XYZ offered is a fixed annuity while the competitor offered a variable plan. The agent informed his client that he should cut his losses and surrender the plan that he has with ABC. To pounce on another company’s temporary shortcoming is unethical. In this case, all the facts were not made clear and the client had no idea that the annuities were designed differently. Apart from poor logic, surrender charges faced alone would cause Mr. X to lose.

Case 2: An agent claims that he sells large life insurance policies by telling clients that they only have to pay premiums for 12 years. After that, the interest would pay for the plan. This magical concept of the “vanishing premium” can be misleading since it is essentially based on a projected interest rate. Projections do not represent guarantees by an insurance company. The agent then boasted that he advises his clients to withdraw part of the cash value after 12 years and invest it in a fixed deposit offered by the same company. The interest from the fixed deposit should then cover the premium. This idea could work out as stated, with the provision that the person plans to withdraw nothing from the plan. The problem is that telling the client to invest in the lower-rate fixed deposit does nothing for the client. The interest rate on savings in the life insurance plan is actually higher, even though only part-guaranteed. The fact that the rate is part-guaranteed suggests that the client may have to contribute premiums for more than 12 years if the declared rate falls below 10%. At best, that would be advice of dubious quality.

Case 3: A policyholder has a fixed deposit with a minimum guaranteed rate of 7.5% and possibly higher, depending on the fund’s performance. The fixed deposit would mature in four years. An agent informs the client that he could surrender the policy and place it on an annuity that he could use as a savings plan (In Trinidad, this is actually possible in certain instances).The agent opined that the 10.5% interest rate on the new policy would be sufficient reason to surrender the fixed-deposit. The actual benefit for the policyholder would have been minimal since the act of surrendering the policy leads to a break-rate being applied instead of the guaranteed rate at maturity. It was an example of both incompetence and self-serving advice. The advice was based on ignorance because the company’s policy did not allow for the new policy to be used after the client’s age. The agent did not compare and contrast the two plans properly either.

Twisting may not be very obvious since the agents in the aforementioned cases attempted to frame their advice as being in the best interest of the client. Poor advice could come from even those with credentials and membership in various organisations for top producers. Sometimes, it takes years before clients realise that they were misled. To prevent this from happening, it is important to treat the advice to surrender a policy as a blazing red flag. An advisor should practise full disclosure and avoid misleading clients about products or company-performance especially. The client has a right to ask about agent compensation or commissions. Ultimately, twisting results in losses for clients and companies. Agents who engage in that unscrupulous activity would and should lose a lot more than their reputations.