Call Toll Free 

     24 Hours a day

  1-888-KEN-LAWW

A rash of policyholder complaints about misleading sales practices has fueled a growing number of class action suits against life insurance companies. The offending practices usually take one of two forms: "churning" (also known as "twisting") or promises of "vanishing premiums."

Churning and Twisting

Once a policyholder has been paying into a whole life insurance policy for a while, its cash value builds up, making the policy more valuable. Some unscrupulous life insurance agents then convince their customers to use the built-up cash value of their existing policies to buy a "new, improved" policy - one with more coverage, different features, or a different payment schedule.

What these agents neglect to tell their customers is that their existing policies are usually quite adequate for their needs, and that when they use the built-up cash value to purchase a new policy, they start from square one in building up cash value in the new policy. This practice of convincing a customer to use an older policy's cash value to pay for a newer, unnecessary policy is called churning. It's also referred to as twisting. It's unethical - and illegal. Agents churn because they earn a commission for each new policy they sell.

The fallout from churning isn't immediately apparent. A customer doesn't have to shell out any money up front because the built-up cash value of the existing policy pays the initial premiums for the new one. But therein lies the problem: once you use the cash value, it's gone, and you're back to building up value in the new policy form $0.

A policy's cash value is actually money that the policyholder owns, although usually just on paper. Cash value can be used as security for a loan or converted into an annuity. An if a policyholder decides to cancel a life insurance policy with built-up cash value, she's entitled to that money, minus the surrender charge.

Vanishing Premiums

Life insurance companies use the money they collect in premiums and invest it-that's how they make their money. In the case of permanent life insurance policies like whole life and universal life, companies then apply some of those investment earnings back to the value of your policy.

During the early 1980s, interest rates were high and it looked like they'd keep on climbing. So life insurance companies projected that the rate of return from investing today's policy premiums would eventually pay for any future premiums. Hence, policyholders who paid into their whole life insurance policies for about a decade would eventually end up with a "vanishing premium," since investment returns from the money they'd already paid in would pay for the future costs of the policy.

As it turned out, those rosy projections weren't accurate. Interest rates fell, and customers who'd been told their policies would start paying for themselves kept getting bills in the mail. Angry policyholders protested, only to be told that insurance company projections weren't guaranteed. In some cases, they were able to prove that they hadn't been informed of that when they signed up for their policies.