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 the 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.
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.
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Also, most carriers offer their permanent life insurance policies 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 decision 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 life insurance overhead charges:
– Are expense charges consistent with 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.
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Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.