- How are life insurance agents paid?
- July 26, 2013
Life insurance selling commission ranges from 50 to 140 percent of the first year’s premium, which varies greatly depending upon the plan being purchased and the initial rate guarantee. Generally speaking, the longer the rate guarantee, the higher the selling commission.
Once a life policy is in force, the selling life agent has little to do, except perhaps for changing an address, a bank form or a beneficiary once in a great while. Since an agent’s expenses are front-loaded (i.e., marketing, paperwork, negotiations, medical records collections, etc) at the time of sale, life insurers pay very little commission on renewals of life insurance policies, typically only 1-5 percent.
Even if your agent discloses their commission, it’s against the insurance regulations in all 50 states for your agent to offer any part of that to you as an inducement to buy – so don’t ask. Also, beware that if you are offered any portion of a selling agent’s commission, you are being offered an illegal bribe.
Consider the agent’s perspective: Selling life insurance is a tough job, which demands a lot of money to just get one new policyholder. Few consumers seek out life insurance, which can be a combination of its gloomy subject matter, easiness to delay purchase or lack of knowledge.
To overcome this obstacle, life insurance products require a needs analysis, which is hard, unpleasant and costly work. It involves other family members, particularly the beneficiary. Even online or mail order life agents have to spent upfront money to locate viable buyers.
Consider the life insurance company’s perspective: they must compensate enough to attract agents into this career while writing enough policies to pay make claims and ultimately make a profit. The intense competition between insurance companies creates enormous pressure to pay the highest possible commissions.
Commission generally increases as production volume increases. For example, a life agent producer who procurers $500,000 of new life premiums each year is paid more than one who procures only $25,000 of premium volume.
The present agent-compensation system is based upon the fact that life policies are hard to sell. Meaning, the more difficult the sale, the higher the commission and the more inefficient the policy is from a consumer standpoint.
Keep in mind that salespeople are good at selling. Here are a few things to take into consideration.
· If you feel pressured in anyway, walk away.
· A good deal today will still be there tomorrow.
· If it looks too good to be true, it probably is.
· Practice saying no. It works well if you’re not sure about something.
Because of all these issues, regulatory help is needed to create a new compensation model that serves the agents as well as the industry. High, or “heaped” first-years commissions are common throughout the industry. Producers then receive smaller commissions, if any, each year, as long as the policy is in-force.
This current model encourages sales but discourages persistency (i.e., keeping policies in-force).
While the need for change has been apparent for years, insurers cannot afford to act unilaterally, and antitrust implications prevent them from acting in concert.
This is an opportunity for state insurance regulators to step up. Life insurance companies should support coordinated state regulatory initiative limiting upfront compensation. However, there is no need to limit the ultimate commission payout. Let competition take care of that.
Specifically, compensation should be split into a selling fee and a service fee. The selling fee would be whatever amount an insurer deems appropriate, but would have a limit on how much is payable within the first year.
For example, a selling fee may be payable for over five years, contingent on the policy stating in-force and keeping up-to-date with premium payments.
On the other hand, a service fee would be paid to the agent who services the policy – who may not necessarily be the selling agent.
Regulators could also exercise control over the commission structure by limiting policy approvals. Companies must design policies attractive to the consumer while satisfying commission demands.
Good policy designs and pricing leads to persistency – and ultimately, profitability. However, it is unrealistic to link compensation with profitability.
Life insurers should enter into good faith, profit sharing agreements with their producers. If they are expected to forgo heaped first-year commissions, they must be confident of a long-term financial reward corresponding with their contribution and commitment.
Permanent life insurance and annuities are profitable for companies achieving sufficient sales volume. Producers can make or break persistency; therefore, companies have an incentive to compensate agents based on persistency.
So, where do insurance companies being in aligning their interests with those of their producers?
An excellent starting point is mandatory commission disclosure at the point of sale. Making producer compensation and overall marketing allowances transparent to the buyer would help bring about lower first-year commissions, which would allow more emphasis on long-term relationships.
Commission disclosure can and should be made as simple as possible.
For example, the producer’s first-year compensation should be disclosed as a dollar amount and as a percentage of the first-year premium. All other marketing costs should be disclosed to the consumer at point of sale.
If it difficult to do this at point of sale, they should be mailed to the applicant. They should then be given the opportunity to ask questions or cancel the application.
Developing a new producer compensation model will require a cooperative effort between the industry and its regulators. Producers and companies would adapt accordingly, consumers would be better served and this would enhance the industry’s public image.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.