28 January 2014 0 Comments

Beware The Twister!

dancing the night awayChubby Checkers made The Twist a popular dance in the 60’s; a harmless enough activity, save an occasional blown knee.  However, twisting in the parlance of insurance is not harmless and is outlawed by all state insurance Commissioners.  The act of twisting is when an insurance agent causes an individual to replace one insurance policy with a new one without revealing to the policy owner all the disadvantages of such a transaction and/or misrepresents purported advantages of the new policy being sold.

Twisting is usually the ploy of an agent wanting to review existing policies sold by another agent.  There are times, however, when the agent who sold you the policy attempts to twist that policy and sell you a new one.  You see, commissions an agent receives on life insurance after the first policy year are insignificant or non-existent.  Commissions paid in the first policy year are substantial.  Most agents act in the best interest of the client, but I have witnessed some very creative rationale from a few agents who try to replace their own policies every few years.

To be sure, there are many times when it is advantageous for you to replace existing life insurance, but you must have your antennae up for unscrupulous practices.  There is always at least one disadvantage to replacing an existing policy: the new policy will have a new two year contestable and suicide clause.  If the agent fails to point this out, he is being less than professional.

Here are a few other points to consider before replacing:

  • Does the new policy have all the features of the existing policy, such as Disability Waiver of Premium?
  • If a policy with cash value is being replaced, the cash value in the new policy will likely be less, especially in the early years.
  • Are the premium and death benefit guarantees as good in the new policy?
  • Is the guarantee on the new permanent policy only to life expectancy, replacing a lifetime guarantee?
  • When cash values are involved is the agent complying with IRC Section 1035 to assure the most favorable tax treatment?

Beware the twister!  Proceed with caution!

Next I’ll be discussing when replacement does make sense and does not constitute twisting.

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