Close the old one and take out a new one? When switching a life insurance policy is justified

What counts as switching, and why does the MNB watch it?

According to a 2024 consumer-protection paper by staff of the MNB (Hungary's central bank and financial supervisor), switching occurs “when, with unchanged or only partly changed needs – typically on the advice of the person selling the insurance – we take out a new life insurance policy of the same kind by terminating our earlier savings life insurance policy or making it paid-up”. The practice is known in English as churning, and the reason for it is simple: the intermediary receives new commission on the new contract, while the client has already paid the costs of the old one. This is why, in its ongoing supervision, the MNB pays particular attention to whether clients are being encouraged during the sales process to take out a new contract while their needs remain unchanged. Under the Insurance Act (Bit.), every proposal must be preceded by a needs assessment, and an independent intermediary must base its recommendation on an objective analysis of a sufficient number of insurance products available on the market (under the Bit. rules for brokers) – so a switching recommendation must start, in a documented way, from what has changed in your needs, not from the fact that a new product exists.

What do the Klassis-Z and OVB cases teach us?

On 9 March 2023, the MNB imposed a fine of HUF 14.1 million on Klassis-Z Biztosítási Alkusz Kft. (a supervisory fine of HUF 6.1 million and a consumer-protection fine of HUF 8 million). According to the press release, the broker induced clients to take out new insurance of the same kind by terminating – surrendering – their existing savings-type life insurance policies or making them paid-up; in addition, it did not in every case fully meet its information obligations, and in several cases it could not demonstrate that it had fulfilled its obligation to carry out an objective analysis of a sufficient number of insurance products available on the market. On 31 October 2024, the MNB imposed a fine of HUF 50.5 million on OVB: before making their decision, clients “did not receive from OVB comparable information, supported by calculations, on the effect of the switch on their savings”, and the practice may even have caused consumers financial harm. The common lesson of the two cases is that switching is not prohibited in itself – but it is lawful only with a documented change in needs, complete information and a comparison supported by calculations. What the MNB demanded, you too can demand of any adviser before you sign.

Where does the loss arise?

The MNB's consumer-protection materials name three sources of loss. The first is the initial cost of the old policy: in the early period of the contract, a significant part of the amount paid in is deducted as costs, so if the policyholder terminates the policy years before maturity, they may get back less than they have paid in – surrendering in the first two or three years involves a heavy loss. The second is the repeated initial cost of the new policy: according to the MNB's calculations, because of the new contract's repeated, significant initial costs – even with a more favourable cost structure – the future value of the new policy often cannot exceed the investment value of the original product. The third is lost returns: the time between exiting and restarting, and starting again from zero. On top of these come items that depend on the type of cover: with pension insurance, the tax credit claimed must be repaid, increased by a surcharge, under the Personal Income Tax Act if the contract ends before the pension purpose is reached; the risk elements – death and accident cover – start again under the new contract with fresh underwriting, possibly with a new waiting period and new exclusions, and at an older age typically with a higher risk premium. I deliberately give no figures here: the extent can only be established on the basis of the conditions of the two specific contracts and the MNB's total cost indicator (TKM) search tool.

When might it still be justified – and what is the alternative?

According to the MNB, switching is beneficial only in very rare cases, for example when the client faces an unforeseeable change in life circumstances. In practice, this may be the case if the purpose of the contract has ceased or changed (the circle of beneficiaries, the savings goal or the time horizon is now different), if the premium is permanently unaffordable, or if the cost structure of the old product is demonstrably worse than that of the new one over the same time horizon – calculated over 10, 15 or 20 years – and the calculation confirms this even after the surrender loss is taken into account. In most cases, however, there is a less costly solution than closing the policy: reducing the premium, taking a premium holiday or making the existing policy paid-up, changing the fund allocation, restructuring the supplementary covers, or simply arranging a new, supplementary policy for the new need while keeping the old one. The MNB's advice for this situation is clear: compare the effects of modifying the existing product and of buying a new product over the same time horizon, read the information documents you are given, and ask questions.

How I handle it, and what to ask any adviser

In my practice, switching does not originate with the broker. If you ask, I review your existing policies, and if something does not fit your needs, I put it in writing – but I recommend closing an existing savings life insurance policy only if the change in your needs is documented, we have set the surrender value and the initial costs of the new contract side by side, and we have also gone through the alternatives of modifying the existing policy. A broker mandate does not authorise the broker to switch policies on its own: every new contract requires your express decision and signature, with written reasons – I also wrote about this in the article on how I work. The insurer pays commission on the new contract, so the conflict of interest should not be denied but stated. Incidentally, from 1 January 2026, MNB Recommendation 13/2024 (XII. 10.) expects independent intermediaries to document that they have presented alternative products and, before the contract is concluded, to explain the right to cancel, the surrender value and the costs. If you receive a switching recommendation – from me or from anyone else – ask four questions and request the answers in writing: what has changed in my needs; what is the surrender value of my current policy compared with what I have paid in; what are the initial costs and the TKM of the new policy; what would modifying my existing policy achieve over the same time horizon. If any of these goes unanswered, do not sign. And if your trust has been shaken, you should also know that you can change broker at any time, and your existing policy does not end as a result.

What to do in practice: if you receive a switching recommendation, ask in writing for the needs assessment, the surrender value, the costs of the new contract and the modification alternative over the same time horizon; check the MNB's TKM search tool; do not sign under pressure; and if you do close the old policy after all, do so only after receiving confirmation that the new contract has come into being.