Twisting

Twisting is the practice of using misrepresentation, an incomplete or misleading comparison, or a material omission to persuade a policyholder to lapse, surrender, borrow against or otherwise give up an existing life insurance policy and take out a policy with a different insurer. Rhode Island's statute is a clear example of how the offense is written. R.I. Gen. Laws § 27-29-4.7(a)(1) defines twisting as "knowingly making any misleading representations or incomplete or fraudulent comparisons or fraudulent material omissions of or with respect to any insurance policies or insurers for the purpose of inducing, or tending to induce, any person to lapse, forfeit, surrender, terminate, retain, pledge, assign, borrow on, or convert any insurance policy or to take out a policy of insurance in another insurer."

Two things about that definition repay attention. The prohibited act is the misrepresentation, not the replacement: a policyholder who is told the truth and switches anyway has not been twisted, and the same switch procured by a misleading comparison has been. And the list of verbs is long on purpose. It reaches inducing someone to retain a policy as well as to drop one, so an agent who misrepresents in order to stop a replacement is inside the same provision as one who misrepresents to cause it.

This is a state term, and it is worth being precise about who defines it. The National Association of Insurance Commissioners is the body that writes the model laws states adapt, and its Unfair Trade Practices Act model, Model 880, does not contain the word twisting anywhere. Its Life Insurance and Annuities Replacement Model Regulation, Model 613, instead directs a state adopting it to fill in a cross-reference, writing at Section 8A that any failure to comply "shall be considered a violation of [cite twisting section of state's unfair trade practices act]." So the model architecture assumes the state has a twisting provision without supplying one. States also do not all use the word: California's classic provision, Insurance Code § 781, sits under the article heading "Misrepresentation of Policies" and prohibits substantially the same conduct without once saying twisting.

Twisting and churning are two offenses, and the line between them is which insurer ends up with the money. Rhode Island defines both in adjacent paragraphs. Twisting, at § 27-29-4.7(a)(1), is procured by misrepresentation and moves the policyholder to "another insurer." Churning, at (a)(2), is "the practice whereby policy values in an existing life insurance policy or annuity contract, including, but not limited to, cash, loan values, or dividend values, and in any riders to that policy or contract, are directly or indirectly used to purchase another insurance policy or annuity contract with that same insurer for the purpose of earning additional premiums, fees, commissions, or other compensation." The provision then lists the conditions that make it unlawful, beginning with doing it "without an objectively reasonable basis for believing that the replacement or extraction will result in an actual and demonstrable benefit to the policyholder," and continuing through failures to tell the applicant that the existing policy's values will be reduced, forfeited or consumed, that the new contract will not be paid up, that further premiums will be due, or that a new contestable period will apply.

The discriminator is one line: twisting is induced by misrepresentation and moves you to a different insurer; churning uses your own policy's values to buy again from the same one. A reader who remembers only that will get the right answer most of the time.

What counts as a replacement is defined, and the definition is broader than "canceled the old policy." NAIC Model 613 § 2(J) defines a replacement as a transaction in which a new policy or contract is to be purchased and it is known, or should be known, to the producer or insurer that an existing policy has been or is to be lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise terminated; converted to reduced paid-up or extended term insurance or otherwise reduced in value by the use of nonforfeiture benefits or other policy values; amended so as to reduce benefits or the term of coverage; reissued with any reduction in cash value; or used in a financed purchase. Reducing an old policy counts. Leaving it in force while draining it counts.

The financed purchase, and the timing rule that makes it detectable. Model 613 § 2(D) defines a financed purchase as one involving the actual or intended use of funds obtained by withdrawing from, surrendering, or borrowing against the values of an existing policy to pay premiums on the new one. It then supplies a timing test, and the test has two halves. For the purpose of a regulatory review of an individual transaction only, where a withdrawal, surrender or borrowing against an existing policy's values is used to pay premiums on a new policy owned by the same policyholder and issued by the same company, and that happens within four months before or thirteen months after the new policy's effective date, it "will be deemed prima facie evidence of the policyholder's intent to finance the purchase of the new policy with existing policy values." Dates alone do not do it; the funds have to have paid the premium. That is a starting presumption about the transaction rather than a finding about anyone, and the model adds that the standard is "not intended to increase or decrease the monitoring obligations" the regulation places on insurers.

The procedural protection a buyer can actually use. Under Model 613 § 3, a producer taking an application must submit a statement, signed by both the applicant and the producer, saying whether the applicant has existing policies or contracts. If the answer is no, the producer's replacement duties are finished. If it is yes, § 3(B) requires the producer to present and read aloud to the applicant, no later than when the application is taken, a notice regarding replacements in the model's prescribed form, signed by both attesting that it was read aloud or that the applicant declined to have it read, and left with the applicant. Section 3(C) requires that notice to list every policy proposed to be replaced by insurer, insured and policy number, and to state whether each will be replaced or used as a source of financing. Section 3(D) requires the producer to leave a copy of all sales material. Where a state has adopted the model, an applicant who answered yes and never saw that notice has a concrete, checkable omission to point at.

Why the law singles this conduct out at all. A replacement pays the selling agent as a new sale, and the buyer's costs largely restart, which makes the transaction attractive to the seller in a way that is independent of whether it helps the buyer. That is not a claim about anyone's character; it is the structure of the compensation, and it is why the model regulation attaches duties to the transaction rather than trusting the incentive. What the replacement actually costs, from a restarted surrender schedule to a fresh sales charge, is set out on our pages covering the 1035 exchange, the surrender charge and the variable annuity, and those are the numbers worth working through before signing anything.

A twisting allegation generally has four parts:

1. An existing policy the policyholder already owns.

2. A comparison presented by a producer, which is misleading, incomplete or omits something material.

3. A resulting act by the policyholder: lapsing, surrendering, borrowing against, converting or retaining the policy, or taking out a new one with a different insurer.

4. The connection between them, which is what the words "for the purpose of inducing, or tending to induce" in Rhode Island's provision are doing.

A hypothetical example using the model regulation's timing test; the rule is NAIC Model 613 § 2(D). Suppose a policyholder withdraws cash value from an existing policy on March 10 and uses it to pay the premium on a new policy with the same company, which takes effect on June 20 of the same year. That withdrawal falls three months and ten days before the new policy's effective date, which is inside the model's four-month window, so under a state that has adopted the model the transaction is deemed prima facie evidence of an intent to finance the new purchase with the old policy's values. Had the withdrawal instead come eleven months after the June 20 effective date, it would still be inside the model's thirteen-month window on the other side. A withdrawal fourteen months after would fall outside both, and a withdrawal that never went toward the new premium is outside the test whenever it happened.

Note carefully what that does and does not establish. It makes the transaction a financed purchase for review purposes, which brings the replacement duties into play. It says nothing on its own about misrepresentation, which is the separate element twisting actually turns on.

Twisting is prohibited conduct, so what follows is what the rules give a policyholder and where they stop.

What the rules give

• A named offense with a defined test, so a complaint has something specific to allege rather than a general grievance about a sale.
• A replacement notice that must be presented, read aloud, signed and left behind where a state has adopted the model regulation.
• A written list of every policy proposed to be replaced, identified by insurer and policy number.
• A copy of all sales material used, which turns a verbal comparison into a document.
• A timing presumption that makes a financed purchase visible from the dates alone.

Where they stop

• Insurance is regulated jurisdiction by jurisdiction, so which provision applies, what it is called, and whether it uses the word twisting at all depend on the state.
• The offense turns on proving a misrepresentation or a misleading comparison, which is harder than showing that a replacement was a poor deal.
• A replacement can be an expensive mistake without being unlawful. Nothing here reaches a switch that was fully and accurately explained.
• The NAIC writes models, not law. A model provision binds nobody until a state adopts its own version, and states amend what they adopt.