What is 'churning' in the context of life insurance policies?

Churning refers to the practice of using the cash value or benefits from an existing life insurance policy to purchase a new policy, often without providing any additional benefit to the policyholder. This action typically occurs when an agent persuades a client to replace their current policy with a new one, leading to additional commissions for the agent but potentially harming the client's financial position.

The critical aspect of churning is that it does not provide a clear advantage to the policyholder; instead, it benefits the agent through new commissions and fees. Policyholders may end up with higher premiums, longer waiting periods for benefits, or less overall coverage. Regulations have been established to mitigate churning, ensuring that agents only recommend policy replacements when there is a demonstrable benefit to the client. Thus, the correct understanding of churning is centered on its detrimental effect on the policyholder's financial well-being while benefiting the agent through arrangements that lack a fair value exchange.