The act of "twisting" when life insurance is being sold is illegal in most states. Twisting occurs when an insurance agent replaces an existing life policy with a new one using misleading tactics. It does not mean that every time an agent replaces a life insurance policy that twisting has occurred. However, if an agent is giving you or someone you know a hard sell to buy a new policy, make sure you understand the consequences of replacing the old policy with a new one.
Life Insurance Long-Term Benefits
A permanent -- whole or universal -- life insurance policy is designed to provide long-term coverage, resulting in either providing a death benefit or an attractive cash surrender value after a period of years. A life policy purchased at a younger age has rates based on your age at the time of purchase and as a policy gets older, the cash value grows at a faster rate. To replace an existing policy, you would pay a higher rate for the insurance, and the new policy would probably not increase in cash value as quickly.
Life insurance twisting occurs when an agent misrepresents the facts to replace a life policy the customer owns with a policy from another life insurance company. The agent uses misleading information or sales tactics to get the customer to surrender the current policy and use the cash value to fund a new life insurance contract. Twisting puts the customer in a worse position as far as his life insurance coverage, and the reason for twisting is to generate commissions for the agent.
Twisting vs. Churning
Insurance laws differentiate between churning and twisting of life insurance policies. If a customer is enticed into replacing an existing policy with a policy from the same company, the result is "churning" if the replacement was not to the customer's benefit. For a replacement to be twisting, the new policy is from a different life insurance company. Whether a life policy is replaced through churning or twisting, the practice is illegal if the customer was misled concerning the benefits of the replacement.
Not all life insurance policy replacements are twisting or churning. If the customer gets actual better benefits from the new policy, it was not an illegal replacement. A life insurance agent must present additional forms when a policy is replaced, letting the customer know the pros and cons of changing policies. If you think a policy was sold using twisting or churning tactics, contact the state insurance commissioner's office and have them look into the matter.