What is twisting in insurance and how can it affect policyholders?
Twisting in insurance refers to the practice where an insurance agent persuades a policyholder to replace an existing policy with a new one, often based on misleading information, which can lead to financial loss for the policyholder.
This practice is illegal in most states in the United States, as it violates regulations designed to protect consumers from deceptive sales tactics.
Agents who engage in twisting often do so to increase their commissions, as they earn higher payouts for selling new policies rather than maintaining existing ones.
The term "twisting" is often used interchangeably with "churning," though churning specifically refers to the practice of switching policies without any real benefit to the policyholder, while twisting focuses on misleading information.
Twisting can be particularly harmful in the context of life insurance and annuities, where the complexity of products can obscure the actual benefits and costs associated with switching policies.
Policyholders may be misled into believing that a new policy offers better coverage or lower premiums, when in fact the changes may lead to reduced benefits or increased costs over time.
One common tactic used in twisting is the presentation of "guaranteed" benefits that are contingent on specific conditions, which may not be clearly communicated to the policyholder.
The financial impact of twisting can be significant; policyholders may lose accumulated cash value in their existing policies, leading to long-term financial consequences.
Some states require agents to provide a written comparison of the benefits and costs of both the existing and proposed policies, aimed at reducing the incidence of twisting.
The insurance industry has been taking steps to combat twisting by enforcing stricter licensing requirements and promoting transparency in policy comparisons to help consumers make informed decisions.
Many consumers are unaware of the potential for twisting and may not recognize red flags, such as aggressive sales tactics or reluctance to provide clear information about the new policy.
Research indicates that twisting is more prevalent in certain demographics, with older adults and those with less financial literacy being particularly vulnerable to deceptive practices.
Agents may also employ emotional appeals, suggesting that a new policy is necessary for peace of mind or for the financial security of loved ones, further manipulating the policyholder's decision-making process.
Twisting can also lead to gaps in coverage, as policyholders may inadvertently find themselves without adequate insurance during the transition between policies.
In some cases, the new policy may have a waiting period for certain benefits, meaning that the policyholder cannot access those benefits immediately after switching.
The practice of twisting can undermine trust in the insurance industry, contributing to broader skepticism and reluctance to engage with insurance products altogether.
To protect themselves, policyholders should always request detailed documentation of any proposed policy changes and seek independent financial advice before making decisions.
Understanding the mechanics of insurance products, including their terms, conditions, and costs, is vital for consumers to safeguard against potential twisting.
Some insurance companies have implemented internal compliance systems to monitor agent behavior and ensure that sales practices align with ethical standards.
Ongoing education and awareness campaigns aimed at consumers can help reduce the incidence of twisting by informing policyholders about their rights and the importance of questioning aggressive sales tactics.