A key risk of churning for the client is

• A. Lower premiums.
• B. Immediate tax penalties.
• C. Guaranteed investment returns.
• D. Higher total costs and potential loss of cover due to replacement.

Answer: (D)

Churning risk arises when a client is encouraged to replace an existing policy to generate commissions, and it often leads to higher overall costs and the potential loss of cover. When a policy is swapped, the old contract may impose surrender charges or fees, and the new policy can carry front-end loads, ongoing fees, and higher premiums. If the client cannot sustain the new payments or if the new policy is underwritten differently, coverage can lapse or riders and guaranteed features from the old policy may not transfer, leaving the client with reduced protection. These cost and coverage concerns are the core issue with policy replacement.

The other choices don’t capture this dynamic: lower premiums aren’t the defining risk of replacement, immediate tax penalties aren’t a guaranteed consequence of churning, and guaranteed investment returns aren’t a typical risk associated with replacing policies.