Ever wonder how much a life insurance agent makes on your policy?
That's a dirty little secret the insurance industry doesn't want you to know, for fear it would kill the sale.
"If the public knew that my general agent gets 120 percent or that I get 85 percent of the first-year premium, that would be an eye-opener," admits one life agent, who spoke on condition of anonymity. We'll call her Anne.
For example, let's say you purchased a whole, universal, variable life or term life policy from Anne and paid $1,000 in premiums the first year. Anne would receive a commission of $850 and her general agent, or GA, the person who solicits Anne's applications, would receive the remaining balance of $350, for 120 percent of your first-year premium. The insurer throws in the extra 20 percent.
Anne's commission is negotiated between her GA and the life insurance companies that underwrite the policies she sells. It is invariably based on a percentage of the first-year premium. If the customer cancels the policy in the first year, Anne must pay it back, or charge back, that amount to the insurance company.
She says most life insurance companies she works with give away the entire first-year premium and more in sales commission. It may seem substantial, but it amounts to pennies compared to what the insurer expects to receive in premiums for years to come.
Best Bang for Your Buck
Agent compensation sometimes continues beyond the first year, says James Hunt, life insurance actuary for the Consumer Federation of America. "There are renewal commissions that for whole life can be as high as 7.5 percent of the premium for the next nine years. Then, after the first 10 years, agents often get very small fees called persistency fees," he says.
But life insurance analyst Tony Steuer, author of "Questions and Answers on Life Insurance," says renewal commissions are fast disappearing on term life products, taking customer service with them.
Regardless of the policy type, an agent earns the same negotiated percentage of the base amount of the policy, Hunt says. That's one reason agents tend to focus on selling cash-value policies, which typically run longer and, if they're investment vehicles, involve larger dollar amounts, rather than term policies, where the dollar amounts tend to be smaller.
When a customer balks at a quote for cash-value life, agents will use a technique called blending to substitute (or blend in) convertible term life for a portion of the permanent life policy. Over time, the term coverage converts to permanent life.
The mechanics, which typically involve what's called a paid-up additions rider, in effect lowers the customer's premium by reducing the agent's commission.
Why doesn't the life insurance agent simply reduce the commission directly? Two reasons: It's the insurance company's duty to reduce, and the negotiated commission is a set percentage that doesn't vary.
Blending has advantages and disadvantages. The upside: lower premiums and guaranteed convertibility. The downside: delayed cash value, possibly delayed earnings, and the annual amount the Internal Revenue Service will allow you to invest in the policy will be limited by the reduced base amount. In addition, not all term life is convertible.
Insurance groups have opposed calls for disclosure of life insurance agent commission on contracts, insisting it would hurt sales. "It's the last financial industry where compensation is not fully disclosed," Steuer says.
Hunt suggests that one easy way to find out how much your agent is making in commission is to obtain an apples-to-apples competing quote from TIAA-CREF, which doesn't pay commissions on its cash-value life products.
But Anne says there's an even easier way: Simply ask your life insurance agent.
After all, his or her rate of compensation is fixed by the insurer, as is the amount the insurer expects to receive based on the policy's target amount. Short of outright fraud, your agent couldn't artificially pad or inflate the contract, even if he or she wanted to.
"Let me put it this way: If I had a company that was A-rated and it cost you $100 and another company that's A-rated and costs $100, what does it matter what I get paid? The (commission) difference is not enough to influence my decision to push one product over another."
That said, how low would she cut her commission via blending to close a cash-value policy?
"I'll go as low as necessary, because a $1 sale is better than no dollars. I tell them upfront: The premium is flexible in these types of policies; you can put in more money if you want or less money if you want. So I'll say, 'Can you do $500 a month? No? Can you do $450? No? Can you do $350? Yes? Done!'"
Bottom line: Your life insurance agent will enjoy a nice payday by setting you up with a policy. Get your money's worth by asking for competing quotes or blended solutions until you're satisfied with your policy.