Insurance · Laws and Regulations

What is 'churning' in the context of life insurance, and why is it prohibited?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

The unethical practice of inducing a policyowner to replace policies repeatedly (often using the existing policy's values) primarily to generate commissions, which harms the consumer and is prohibited

A A way to lower premiums
B A normal sales practice
C The unethical practice of inducing a policyowner to replace policies repeatedly (often using the existing policy's values) primarily to generate commissions, which harms the consumer and is prohibited
D A type of annuity

Why this is the answer

Churning is an unethical and prohibited practice in which an agent persuades a policyowner to repeatedly replace existing life insurance — frequently by using the cash values of the existing policy to fund the new one — primarily to generate new commissions rather than to benefit the client. Churning exposes the consumer to new contestability periods, surrender charges, and other disadvantages while enriching the agent. It is a form of misconduct that can lead to license discipline. (It is related to but distinct from twisting, which involves misrepresentation to induce replacement.) Recognizing churning as prohibited, commission-driven replacement is important ethics-and-regulations content.

Source: NAIC Model Outline, Churning

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About this topic: Laws and Regulations

Laws and regulations for life insurance cover producer licensing, the insurance department, replacement rules, advertising, privacy and the unfair trade practices every producer must avoid. This is one of 10 Life Insurance questions on laws and regulations, each with a full explanation on a single study page.

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What is 'churning' in the context of life insurance, and why is it prohibited?

Why this is the answer

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About this topic: Laws and Regulations

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