Life & Health Insurance Exam (National Portion)Ethics and SuitabilityMedium
A client, Ms. Davis, is a 70-year-old widow living on a fixed income. Her insurance producer recommends she surrender her existing whole life policy with a cash value of $50,000 to purchase a new indexed universal life (IUL) policy. The producer emphasizes the potential for higher returns with the IUL, but fails to adequately explain the surrender charges on her current policy, the potential for policy lapse if index performance is poor, and the higher fees associated with the new policy. Which of the following best describes the producer's ethical violation?
- ATwisting
- BChurning
- CUnfair discrimination
- DRebating
Show answer & explanationAnswer & explanation
Correct answer: A. Twisting
Twisting occurs when a producer induces a policyholder to lapse, forfeit, or surrender an existing policy to purchase a new one, to the detriment of the policyholder, often through misrepresentation or incomplete comparison. The producer's failure to fully explain the disadvantages of the new policy and the loss of benefits from the old one fits this definition.
Why the other options are wrong
- B. Churning involves replacing policies repeatedly within the same company to generate new commissions, which is not explicitly stated here.
- C. Unfair discrimination involves treating individuals unfairly based on characteristics like race, religion, or national origin, not policy replacement advice.
- D. Rebating is offering a client something of value not specified in the policy as an inducement to buy.
Twisting
An illegal and unethical practice where an insurance producer persuades a policyholder to cancel an existing policy and purchase a new one, typically with another insurer, to the policyholder's detriment.
- Involves replacement of an existing policy.
- Often uses misrepresentation or incomplete comparisons.
- Results in financial disadvantage to the client (e.g., new surrender charges, loss of accumulated value).
Memory trick: Don't Twist, Churn, or Rebate; that's Unfair to your mate!