Avoiding Scams / Policy Churning

Policy churning: an evaluation framework

"Churning" is the industry's own term for a documented conflict of interest: an agent recommends replacing an in-force policy, not because the replacement objectively serves the client better, but because a new policy generates a new commission. It is a recognized problem in this industry, and it merits an evaluation on its own terms before any replacement recommendation is accepted.

How the recommendation typically presents

A churning recommendation rarely identifies itself as such. It is typically framed as a straightforward improvement — a lower premium, additional coverage, a different carrier. What that framing routinely omits is the cost of resetting the contract: time already accrued within the existing policy's contestability period, and, where the policy is permanent and has accumulated cash value, that value as well.

Quantifying the cost of replacement

Two costs merit explicit evaluation. First, nearly every life insurance policy carries a contestability period — typically the first two policy years — during which the insurer retains the right to investigate a claim against the original application. Replacing the policy resets this clock on an entirely new contract, irrespective of how far the existing policy had already progressed past its own window. Second, where the existing policy is whole life and has accumulated cash value, surrendering it to fund a new policy can mean forfeiting that value, or incurring a surrender charge. A new policy also requires underwriting at the applicant's current age and health, which frequently produces a higher premium than the one already secured.

Why the incentive exists

The underlying incentive is direct: new business generates a new commission, while an undisturbed existing policy generates none. The great majority of licensed professionals do not act on this incentive at a client's expense — most replacement conversations are driven by a genuine change in need. It is precisely this incentive, however, that makes churning possible in the minority of cases where it does occur, which is why an independent evaluation is warranted regardless of how the recommendation is framed.

A pre-replacement checklist

A legitimate basis for replacement does exist in some cases — a genuine change in circumstances, or a materially better product. Any such recommendation should withstand the following evaluation before proceeding.