Churning is slightly different and is called internal replacement. It is the practice of inducing a person to drop their existing policy to buy another policy; however, it is within the same company and usually with the same producer who sold the original policy. Churning typically takes place when policy values are used to purchase another policy with the same insurer for the sole purpose of earning additional premiums or commissions.
The agent bears the burden of proving a policy replacement is in the client's best interest.
Ordinarily speaking, replacing a policy is not usually in the client's best interest due to the following factors:
- changes in health and age;
- new contestable period;
- new policy fees and expenses;
- possible loss of policy upgrades or automatic improvements that may meet the policyowner's objectives; and
- loss of grandfathered rights.
Following are some excellent guidelines and questions to reconsider when contemplating policy replacement.
- How does the new insurance need compare with the past need?
- Is the client drawn to contract features in the replacement policy that the existing policy lacks?
- What effect will the replacement policy have on future premiums, cash value accumulations, and insurance charges?
- What guarantees are being lost or gained?
- Will the policyowner incur surrender charges if the existing policy is cashed in?
- Is the policyowner's instability or underwriting status different?