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  • Overhead expenses can affect life insurance policy
  • July 19, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    Overhead and administrative expenses include all the operating costs that a life insurance company incurs in the course of doing business.

    These costs fall into four basic categories, which are cost of facilities, data processing, employees (labor), and sale expenses (commissions, marketing costs, sales offices, etc.).

    All of these expense factors will vary greatly from one company to another.

    Commissions are a significant part of the overhead expense factor primarily in the first year or so, and can have a significantly negative impact on the long-term performance of a permanent life insurance product.

    Commission is a significant part of the overhead expense factor for life insurance companies, especially during the first year of a policy.

    An agent’s first-year commission includes any bonuses or allowances, which can exceed 100 percent of the first-year premium. But, this is rarely the case.

    This is why most traditional cash value life insurance policies have almost no cash surrender value for the first few years. Policies typically pay a renewal commission from two percent to 10 percent for 10 plus years.

    Also, most carries offer their permanent life insurance polices with the option of adding in term life insurance, which reduces the commission. Some have also lowered the “target” premium, which is the level in which the insurer will pay the maximum commission.

    There is skepticism that this provides additional profits for the company rather than the consumer. This will depend on the insurer, and it is always a good idea to get proposals from at least two companies.

    However, the more proposals from different companies will not make this decisions easier; in fact, it could make it overwhelming. This being said, it is advised to cap the number of companies at a realistic figure.

    Consumers now have the option of a no-load or low-load policy, which is a policy that pays a reduced commission or none at all. However, some of these policies do pay a marketing allowance, which is similar to a commission.

    Low-load and no-load policies tend to be more competitive from the standpoint of a consumer, especially during the first few years. This is because of the lower surrender charge or lack of any.

    Perhaps, one day in the near future, there will be more no-load and low-load life insurance policies from which to choose.

    Unfortunately, there are only a few of these policies in-force today.

    Here some other issues to consider in reference to expense charges:

    -Are expense charges consistent for new and existing policies? If they are not, this is an indication that old policyholders are subsidizing the company’s attempt to capture new business.

    -Do expenses vary by product or underwriting class? This is reasonable only if justified by a company’s actual or reasonably anticipated experience. Otherwise, it is an indication of overly aggressive marketing and subsidization of the product with the lower expenses.

    -Are expenses, in an illustration that discloses them, adequate and realistic? If not, it is likely they will be subsidized by higher charges for mortality or a lower interest-crediting rate. Conversely, an unrealistic and overly aggressive projection of mortality charges could be offset by higher expense charges, or, again, a lower interest rate.

    If you have any questions, email me at

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.

Creative Commons License
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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