Understanding Twisting and Churning: Definitions and Penalties

In the insurance industry, policy replacement is a common occurrence. Clients' needs change, financial goals evolve, and newer products may offer better features. However, when an agent encourages a client to replace an existing policy through deceit or for the primary purpose of generating a new commission at the client's expense, it crosses the line into unethical and illegal territory. Two specific terms dominate this ethical landscape: twisting and churning.

Understanding these concepts is vital for passing the practice Ethics questions and maintaining a compliant professional practice. Both practices are considered unfair trade practices and are strictly regulated by state insurance departments. While they share similarities, the distinction lies in the source of the replacement and the methods used to convince the policyholder to switch.

For a broader overview of ethical standards, you should also review our complete Ethics exam guide to understand how these prohibitions fit into the larger regulatory framework.

Twisting is the act of inducing a policyholder to lapse, forfeit, or surrender an existing insurance policy and replace it with a new one from a different insurance company, based on misleading or incomplete comparisons. The core element of twisting is misrepresentation.

An agent commits twisting when they purposefully highlight only the benefits of the new policy while ignoring its drawbacks—such as new contestability periods, surrender charges, or higher premiums in later years. It is not twisting to replace a policy if the replacement is truly in the client's best interest and the agent provides a full, honest comparison. However, if the agent uses false statements about the current insurer's financial stability or makes deceptive claims about the new policy's performance to earn a commission, they are guilty of twisting.

• Misrepresentation: Making false or misleading statements about the terms or benefits of any policy.
• Incomplete Comparison: Failing to mention the loss of accumulated cash value or the restart of the suicide/contestability clauses.
• External Focus: Twisting specifically refers to moving a client from Company A to Company B.

Churning (sometimes referred to as internal twisting) occurs when an agent induces a policyholder to replace an existing policy with a new one from the same insurance company. This is typically done to generate additional commissions for the agent without providing a demonstrable benefit to the insured.

Often, churning involves using the values (cash value or dividends) of an existing policy to purchase the new policy. While this might sound convenient to the client, it often results in the depletion of the original policy's equity, higher overall costs, and the loss of favorable terms from the older contract. Because the agent already has a relationship with the client through the existing company, churning is often viewed as a significant breach of fiduciary-like trust.

Regulators look for patterns where an agent repeatedly replaces policies within their own book of business shortly after the original policies' surrender periods have expired or when new commission structures become available.

State insurance departments take twisting and churning very seriously because these acts directly harm consumers and undermine the integrity of the insurance market. The penalties for these violations are severe and can end an agent's career.

Common penalties include:

• License Revocation or Suspension: The most common outcome for repeated or egregious violations is the permanent loss of the authority to sell insurance.
• Administrative Fines: Fines can range from a few hundred dollars to tens of thousands of dollars per violation, depending on the severity and state law.
• Cease and Desist Orders: Regulators may issue orders demanding the immediate stop of all replacement activities.
• Restitution: Agents or agencies may be forced to pay back the client for financial losses incurred due to the unethical replacement.
• Criminal Charges: In some jurisdictions, if the twisting or churning involves significant fraud or theft of premiums, it can be prosecuted as a felony.