scam alert annuity churning twisting

Dont fall victim to annuity twisting or churning

You get a call one day from an insurance professional wanting to talk to you about annuities. You politely tell the advisor you have an annuity you’re happy with. The advisor insists you will do better in the long run with a replacement contract, even if it means paying a surrender charge. You agree to hear the agent out.

If this happens or has happened to you, you may be the victim of an unethical and illegal insurance practice called churning or twisting.

Twisting refers to the practice of using misrepresentations or falsehoods to convince clients to replace an annuity or life insurance contract of one insurance company with one from a different company. Churning is similar; the only difference is that the agent tries to replace a contract with one from the same insurance company. In both cases, the new contract is not in the client’s best interest.

Churning in insurance is not quite the same as churning in securities, though both are unethical and often illegal, and the end goal is to increase the advisor’s commissions. Churning in securities refers to excessive trading within a client’s portfolio.

Why agents twist and churn

Insurance agents who engage in these tactics do so to earn more commissions, since each sale earns them a percentage of the premium paid. Churning and twisting annuities are potentially lucrative because the agent does not have to convince the buyer of the value of annuities since the client already owns one or more. The advisor only has to persuade the client that it’s worth paying the surrender charges to replace the existing contract.

State insurance laws forbid twisting and churning and agents can be fined and/or lose their license for engaging in the practice. In extreme cases, advisors have been sentenced to prison.

In addition, insurance companies strongly discourage the practice and will review your current contract and the proposed contract to ensure the new one is a suitable replacement.

Even with these protections, consumers should be wary if an advisor tries to convince them to replace an annuity contract, especially if it’s still in its surrender period.

Tactics used to churn and twist

Agents engaged in churning or twisting will employ various tactics to convince buyers that replacing an annuity is the best decision.

The most common method is to tout the benefits of the new contract, such as higher payout rates or features not available on your current annuity.

Those who try to churn contracts of the same company may claim the new contract offers better crediting rates than your current annuity. While this may be true, it may not be enough to offset the surrender charge on your current contract.

Advisors will also attempt to replace one type of annuity for another. For example, he or she may tell you that your fixed annuity is paying such a low rate that you’re better off in a variable annuity, or that your money is too much at risk in a variable and you’d be better off with an indexed annuity.

An advisor who engages in twisting will often try to discredit the insurance company that issued your current contract. The agent may use a scare tactic by questioning the insurer’s financial stability and its ability to meet its obligations while promoting another company’s financial strength. This is also a common tactic if a company has been purchased by or merged with another company.

You can always check the financial strength ratings of your insurer and the company the agent is proposing. Unless there’s a major discrepancy in financial ratings, it’s probably not worth it to pay surrender charges to change companies.

Another tactic is to offer an annuity that pays a premium bonus and convince the buyer that this bonus will cover the surrender charge on the replaced annuity. The thinking goes that the premium bonus will cancel out the cost of the surrender charge, and you’ll have a better annuity product than you had before.

In rare cases, the math may can work out in the client’s favor, but you should proceed with extreme caution. First, surrender charges are percentages of an annuity’s accumulated value, so if the contract has been credited interest the surrender charge will be more. Second, annuities with premium bonuses typically carry higher fees and expenses than those without bonuses.

Replacing your current annuity contract can be legitimate, but if it’s not suitable for the client, then it’s definitely unethical, probably illegal, and could be an example of twisting or churning. Make sure you do a thorough comparison of both contracts and take into account the surrender charge on your current annuity.

If you feel you’re being targeted for twisting or churning, resist the agent’s sales pitch and report the advisor to your state insurance department.