Summary: (Complete Show Notes Below) In the 61st episode of the Financial Procast: We’re pulling back the curtain on life insurance commissions. Yep, you read that right…we’re actually going to talk about how much commission is paid on life insurance policies. Wait a minute! If people actually know how much commission you’re making, they won’t buy the policy. Or at least that seems to be the prevailing theory amongst many folks in the life insurance industry. In fact, just a few years ago the state of New York put in place Reg. 194 which requires an agent to disclose commissions to their clients, if they client asks them directly for that information. Now, it’s not really cut and dry. The regulation actually requires the commission to be disclosed as a range over a period of time, but it’s a start. Why are some agents diametrically opposed to full disclosure? We’re not exactly sure but we have a theory: Perhaps they’re not doing the best they could for their clients and/or prospective clients and feel some guilt about the money they’re being paid as a result? Think back to a car buying experience as an analogy for this sort of a relationship. You walk on the lot of a car dealership, find the car you want, talk to a salesperson and thus begins the fun. They give you a number, you ask “is that the best you can do?”. Well actually, no, it’s not the best….so they go off to talk to the “manager” and then come back with a better deal. This process repeats several times until you actually get to the best number. Life insurance isn’t exactly the same, however, as we’ve stated many times—there is a right way to design a cash value life insurance policy to optimize cash value performance. Here’s where the obfuscation comes into play. There are a great many ways an agent can design a policy. 1. He/She can apply your given premium to a policy that is focused on maximizing the death benefit. This is the traditional way of selling life insurance and it also maximizes the commission paid to the agent. Now, long term policy performance will be okay but the short term (the first 10 years or so) will almost always have a negative internal rate of return on cash surrender value. or… 2. The way we do it—apply your given premium to the policy that is focused on maximizing your return on cash. Most often, this means we will be squeezing the death benefit to the lowest allowable level (avoiding the creation of a modified endowment contract). This is very non-traditional and it lowers the commission paid on the policy. Result: A much shorter time to see a positive return on cash, a policy that has lower internal costs (as a result of the lower death benefit and base policy premium). There are times that people will ask us, “Is this the best you can do??...Can you change this or change that?” We’re always willing to make the changes as requested but we start by presenting the best design. Which is probably the world’s worst sales tactic? Then again, we never claimed to be great salespeople—just a competent resource. We never consider how much we’re getting paid in commissions when presenting options to our prospective clients. Our presentations just offer up the best performing contracts for the situation. Let’s Get Specific Most of what exists out in the ether regarding the exact commissions paid on life insurance products is wrong. No way around it. That’s probably because the people who attempt to write about it or discuss it aren’t actually insiders and have very little understanding of how commissions are actually paid. Whole Life Insurance For starters, let’s look at the base premium on whole life insurance. Most base commissions for most life insurance products sit at 50-55% of the premium. Then there is an expense allowance that is paid which brings the total to 70-110%, depending on the product. Now this is what’s paid to the agent typically.
