Churning

Glossary

When you think of “churning,” chances are you think of the process of making butter. Or perhaps that’s what your stomach does around tax time each year. But in the insurance world, churning has a much different meaning. When an insurance agent persuades a policyholder to repeatedly switch policies, this is known as “churning” or “twisting,” and it is a violation of the Unfair Trade Practices Act. Any type of misrepresentation, or any false, deceptive, or misleading statements used in connection with churning are also violations of the Act.

The motivation behind churning is that insurance agents often get higher commissions for new policies rather than for renewals, and they can also receive bonuses based on the quantity of new policies they sell. Churning frequently occurs in connection with life insurance, as such policies often have a cash value attached to them. The agent who is engaging in this type of churning convinces the insured to either use the cash value of the policy (known in the industry as “juice”) or borrow against it in order to get a new policy that the insured really does not need. This usually results in the policyholder starting from scratch to build up the cash value of their policy all over again. Churning also occurs when an insurance agent induces a policyholder to switch to a policy offered by a different insurance company, without any actual benefit to the policyholder. Several large insurance companies were subject to class action lawsuits for churning in the ‘90s.

Should you replace your policy?

Sometimes your financial situation or goals change, and sometimes you really can benefit from a new policy. If your insurance agent suggests a change in policies, ask the following questions:

• *What will happen to the cash value of my current policy?* You should retain most or all of the cash value.
• *What is the difference in the guaranteed interest rate?* If the proposed policy doesn’t provide a higher rate, it isn’t worth the switch.
• *How does this new policy’s benefits differ from my present policy?*

Insurance is big business

Because most of us need some type of insurance throughout our lives, insurance companies will always be around, competing for your business. By exercising caution and educating yourself about the types of coverage available, you will have a better chance of getting what you need without getting fleeced. Always be wary of an insurance agent who offers to get you supplementary coverage for little or no additional cost. Make sure you check out small companies thoroughly before signing on with them. Most importantly, be sure to get everything in writing before you sign any paperwork.

What if you’ve already been victimized?

The first thing to do is to contact your state’s Department of Insurance. Many of them have forms available online that will assist you. Once you’ve proven that you were victimized, most reputable insurance companies will reimburse you promptly. If you have any additional problems, you may need to consult with an attorney.

Additional Resources

National Association of Insurance Commissioners