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Anatomy of a misleading life insurance sales pitch

Life insurance policies are designed to give us financial protection in a time of great need. But what happens when that need arises and that policy isn't what you expected? Sadly, some people fall victim to misleading sales pitches and lose the money they've paid into policies that weren't quite what they thought.

When life insurance policies sound too good to be true

One of the most common misleading sales tactics is often referred to as "churning" or "twisting." This happens when you have a life insurance policy but an agent talks you into buying another policy with a larger death benefit -- and usually higher premiums. You're told this new policy won't cost any additional money because it will be paid for by the money you've already paid into your old policy -- thus depleting the cash value that your policy once had.

Those who fall for a churning sales pitch often believe they are trading up for a better policy. Instead, they find out they are starting over: the money they've paid into their previous policy is now gone.

"Churning has always been an issue,” says J. Robert Hunter, a former Texas insurance commissioner who now works with the Consumer Federation of America. “If you have a cash value policy like a whole life policy, where you're buying life insurance but [also] putting aside money, when they churn you from one to the other, they take the money out of one to the other--and they get a big commission on it. Every time a broker churns you, they make a lot of money, and you lose a lot of money. There's a great temptation of among brokers to do this."

Another misleading practice is misrepresenting the cost and terms of a policy. Although misrepresentation is illegal, it’s your responsibility to read the contract thoroughly and make sure you understand its terms.

Another shady practice is known as “vanishing premiums.” It was common during the financial boom of the last decade. It relied on convincing buyers that the interest rate in their policy would build up cash value quickly and would be enough to then pay premiums. But policyholders found themselves with large bills anyway. However, Hunter says current economic conditions have made this particular misleading sales pitch obsolete.

Buyer beware

It’s important to scrutinize your changing life insurance coverage requirements, but don't let a policy change create an opportunity for an unscrupulous agent to rip you off. For instance, many people look for a life insurance policy with larger benefits when they start families. Years later, they might decide that their needs have changed. At such transition points, be careful not to fall for a policy pitch that has hidden costs.

In the end, Hunter advises that people exercise caution when choosing a life insurance policy: "If you have a bad policy and a good one can replace it, and you won't lose much money, great. But ask what will happen, and what will [the agent] make on the new policy, and where does that money come from. The insurance company doesn't give money away. You're paying it."

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