C4-L3-P7

Replacement Continued

1. Twisting also is referred to as external replacement.
   
   Twisting involves illegally inducing a person to drop existing insurance to buy similar coverage with another producer or company. This often is associated with making false statements (Misrepresentation) about another insurer or producer, an illegal act that also runs contrary to ethical market conduct.
   
   
2. Churning also is known as internal replacement.
   
   Churning involves replacing policies within the same company, often by the same producer who sold the original policies.

When in Doubt: As a rule, producers should avoid replacement unless it is obviously so appropriate that they cannot in good conscience think it best to leave an existing policy in force. Most of all, they should not look for opportunities to replace existing coverage. They never should initiate replacement to generate commissions for themselves.


It may sometimes be advisable to replace a client’s policy with another. However, the litmus test must be how well the action serves the best interests of the client, not the producer.

Frequently, replacement, especially when cash value policies are involved is not clearly in the client’s favor. Before executing a policy replacement, producers should make sure it is appropriate. Also, they should not assume that it is automatically acceptable to replace a policy with another one from the same company.

In most situations, reports the National Association of Insurance and Financial Advisors in its consumer publication Points to Ponder, "If You’re Considering Replacing Your Life Insurance, the life insurance you already own is your best buy."

This generally is true for the following reasons:

• Changes in health and age. The risk always exists that the client has become uninsurable or insurable only at a higher rate. Even if the client’s health is sound, a whole life policy purchased at age 20 almost always carries a lower premium than one purchased at age 48.
  
  
• New contestable period. A company’s right to challenge a death claim or other information, usually within two years from the date of policy issue, may expose the client to the risk of dying without coverage or may subject beneficiaries to legal conflicts.
  
  
• New policy fees and expenses. The new policy often comes with new sales loads, policy fees and other expenses, which may mean it could take years before the client breaks even in terms of total policy values.
  
  
• Possible loss of policy upgrades or automatic improvements that may meet the policy owner’s objectives. Many companies are introducing unilateral policy improvements to existing policies. These also should be considered before a replacement is initiated.
  
  
• Loss of Grandfathered Rights. For example, if the original policy was purchased when tax laws were more favorable, replacement may entail the loss of “grandfathered” income tax benefits.