The Agent’s Commission is Their Motivation
The replacement of existing life insurance policies with new policies (referred to as twisting) is a practice that has been abused by insurance agents for decades. Because the agent’s commission is heavily weighted toward the first year’s premiums (commissions equaling as much as 120% of first year’s premiums) their financial incentive is to convince clients to buy policies, not to service old policies.
The agent makes larger commissions when their client rolls over the cash value of their existing policy into a new policy because the cash value (often tens of thousands of dollars) becomes part of the first year’s premiums and the basis of the agent’s commission.
The replacement of an existing life insurance policy is almost never to the insured’s advantage because of the following:
- Premiums on new policies are generally higher because you are older than when you purchased your existing policy and your health may be worse.
- New policies may have high costs the first few years to cover the expense of selling and issuing the policy.
- You may lose cash value built up in your existing policy because of surrender charges.
- A new policy will contain a contestability clause that allows the insurance company to rescind the policy within the first two years.
Twisting Policies May Result in No Policy
This last point became of special interest to me when a widow came to my office after her husband’s life insurance company refused to pay her the benefits under his life insurance policy. The insurer rescinded (retroactively cancelled) the policy because her husband had failed to check off the box on his application that would have informed the insurer that he had high blood pressure (an insurer can only rescind a policy within the first 2 years after issuance of the policy). Unfortunately, his agent had talked him into turning in all his old policies (that would have paid the widow’s claim) for this new policy that paid the widow nothing. This resulted in my firm suing the insurance company and the agent on behalf of the widow. Though we prevailed on behalf of our client, no one should have to go into litigation to receive the benefits of an insurance policy.
Because of these problems with replacing existing life insurance policies with new policies it is often said that “your best life insurance policy is the one you already have.”
An insurance agent has a fiduciary duty to its client to fully inform them of not only the advantages, but the disadvantages of replacing an existing policy. It is unlawful for an agent or insurer to recommend the replacement of an existing policy by use of an inaccurate presentation or comparison of an existing policy with a proposed new policy. (Cal. Insurance Code 10519.8(a)).
There is nothing wrong with adding additional insurance to your existing coverage. However be very wary of an agent who suggests that you surrender an existing policy in favor of a new policy with shiny bells and whistles. Ask the agent how much his commission will be and whether there is any cash volume in your existing policies.