Let’s Talk Commissions
On the sale of dividend-paying whole life insurance
[If you are an licensed life insurance agent unaffiliated with my office who has been redirected to this essay in response to an inquiry to Griggs Capital Strategies regarding whether I will split commissions on the sale of a life insurance policy for any reason, the answer is no. We thank you for your interest.]
[Note: What follows is not legal or tax advice. What follows is my understanding of the nature of life insurance agent commission, which I am sharing with you on account of the fact that I cannot find another resource that accounts for my particular perspective. We encourage you to conduct your own research and engage the relevant, licensed, qualified professionals before making any decisions about anything.]
Background
Part of me can’t believe that I’ve been in this business for nearly seven years and have not already written this essay.
If you are investigating the Infinite Banking Concept (IBC) or the purchase of dividend-paying whole life insurance for any reason, you may be interested to know some of the details about how licensed life insurance agents are paid.
If you are a newly licensed life insurance agent, or are considering becoming one, you too may want to know what goes on behind the scenes with agent pay.
If you are a seasoned life insurance agent and have inquired with me before about whether I will split commissions on the sale of insurance with you for any reason (see above…), and you received what may be perceived as a rather blunt response, you might be wondering about why I react the way I sometimes do about these questions.
The subject of life insurance agent commission provokes anxiety on all sides — for a potential client, for a current client, for the new or incoming agent, the senior agent, and home office staff and executives. It stresses everyone out.
Part of the anxiety, in my view, is attributable to the fact that this particular landscape is basically completely foreign territory. I have personally interacted with several agents, for example, who are currently contracted with a life insurance company through one of that company’s particular distribution channels, who do not know the difference between a commission scale and a commission split.
We seek to shed light on the facts, as I understand them, of life insurance agent commission with specific emphasis on the sale of whole life insurance policies built for the IBC where there may be three or more constituent premium elements to the contract, including base premium, PUA rider premium, term rider premium, and premiums for various other riders (like “Disability Waiver of Premium” riders).
[Editorial note: I do use the royal “we” throughout the piece. I hope it’s not confusing.]
Then, we will examine my own views on commissions as they pertain to policies acquired through my office.
As usual, I expect that agents by and large will disagree with my views here, so please expect to receive pushback in the event you find occassion to share this essay with other life-licensed agents. We respect professional disagreement and acknowledge that our view will diverge from conventional opinion.
The Basics
To understand agent commission, it will be helpful to first address agent licensing and contracting.
Individuals who wish to sell insurance from companies domiciled in the United States must carry a life insurance license from the state insurance commission or department in their resident state. This license is typically called a resident license.
To sell insurance to an individual who resides in a state other than the agent’s resident state, a non-resident license issued by the state insurance commission in the state in which the potential client resides. On-going maintenance of a non-resident license is contingent on the maintenance of the agent’s resident license.
An appropriately licensed agent will “contract with” or “get appointed with” a particular life insurance company. We call life insurance companies carriers. An independent life insurance agent, which means an agent who is not “captive” to a single life insurance company may be contracted/appointed with more than one life insurance company. For example, I am currently contracted with three different life insurance companies.
We will focus on independent agents in this essay, since most who pursue a policy designed for the IBC will likely interact with an independent agent.
Carriers have different distribution channels through which it seeks to place its products with premium-paying customers.
For insurance companies that work with independent agents, there are five broad categories of distribution channels for the sale of insurance. Some will group them differently. They are:
- Institutions (e.g. banks, credit unions, Wall Street mega-corporations, etc.)
- Direct to consumer (e.g. paper mailers)
- Independent Marketing Organizations (IMOs)
- Field Marketing Organizations (FMOs)
- General Agencies (GAs)
Agents you interact with for the purposes of the IBC are often contracted with a given carrier through one of the last three channels in this list: FMOs, IMOs, and GAs.
An FMO is essentially a wholly-owned subsidiary of a given carrier. It’s an in-house distribution channel where the products (the policies) on offer come from a single carrier.
An IMO is a not a subsidiary of a given carrier. It’s “independent” in that “the same IMO” — in fact, the same legal entity, be it a natural person or corporation — will be contracted with more than one carrier.
A GA is another form of independent life insurance sales distribution. The same person or firm may “have a GA contract” with one or more life insurance companies.
A note on our terminology: to my understanding, it is a matter of law, that a life insurance agent is an agent of the carrier.
We often hear talk, colloquially, of an individual life insurance consumer having “his or her agent.” The principal in the principal-agent relationship as it pertains to the sale of insurance is not the consumer, it’s the carrier. Therefore, life insurance agents owe a fiduciary duty to the carrier.
This paradoxical situation is an endless source of concern, confusion, regulation, and frustration. Activist insurance commissions are eager to add so-called “Best Interest” rules whereby life-licensed agents must serve the amorphously-defined “best interest” of the consumer while simultaneously maintaining fiduciary duty to the carrier. This irritates some, not only for the bureaucracy, waste, and confusion these different labels and relationships create, but also for the fact that it indulges and accentuates the contemporary understanding of commissioned life insurance agents as not too far up the ranks from the lowest slime of the earth you might imagine.
My view is that the best way to prepare the landscape for productive, lasting, mutually beneficial exchange is the insistence on shared reference to true information. As Nelson said, “if you know what’s going on, you’ll know what to do.” This is why we allocate great effort to the dissemination of this sort of information.
There are some differences across FMOs, IMOs, and GAs. We will focus on IMOs and GAs, since in-house FMOs often do not market directly and consistently in terms of the IBC. The IBC is not a sales tool for life insurance agents; the companies did not create it; and when Nelson Nash himself attempted to share it with them, they refused to understand it. Consequently, materials that an agent who happens to be contracted through an FMO-type distribution channel might use to present himself to the marketplace are heavily scrutinized and often rebuked by in-house attorneys.
Most IBC and IBC-adjacent type life insurance business is conducted through IMOs and GAs.
IMOs and GAs differ, on one margin among others, in the composition of compensation paid upon the sale of an insurance policy.
Generally speaking, the compensation paid on a sale through an IMO will consist mostly if not totally of cash commission. Agents contracted through IMOs typically are not eligible for company-sponsored trips and there are no bonuses linked to production volume (the number of policies sold) or the persistency rate (the number of policies or the amount of illustrated premium that remains inforce expressed as a percentage of policies sold/premium illustrated). Relative to GAs, cash compensation paid on the sale of insurance through an IMO is higher, all else equal.
Agents contracted through GAs are typically eligible to qualify for company-sponsored trips in the event that they sell enough policies and exhibit very high persistency. Consequently, the composition of compensation to a GA distribution channel will consist less in the form of cash commissions relative to IMOs, and will feature compensation in-kind like paid trips with other top producers and quarterly or annual cash bonuses in the event the agency meets production and persistency requirements.
Given the differences in the composition of compensation, large life insurance sales agencies (not the carriers!) with a substantial branding and marketing presence are almost always operating under IMO contracts. IMO agent contracts provide for cash commissions that are typically (though I’m sure not always) less sensitive to persistency and production requirements. GA agent contracts provide for cash commissions that are typically more sensitive to the agency’s production levels and persistency percentages.
Therefore, the IMO distribution channel is inherently more conducive to “building an agency” since compensation is often less sensitive to the quality of the business.
I have heard, second-hand from life insurance company staff, of well-known IMO agencies with persistency percentages in violation of the contractually specified requirement.
Let me say that again.
No matter whether an agency is contracted with a carrier through an IMO or a GA, there are always minimum production and persistency requirements. You must sell enough policies across the particular agency and enough of those policies must remain in force in order to maintain the contractual relationship with the carrier.
While IMO and GA contracts are written so as to give the carrier the right to cancel an agency contract in the event of subpar production or persistency, they are not written so as to require the carrier to do so.
This unwillingness to enforce persistency requirements — should these rumors be true — is unconscionable. Carriers should strictly enforce persistency requirements so that bad actors looking to turn and burn clients are privately excluded from the market place.
The failure to enforce persistency requirements is a major contributing factor to the gamified, spammy, low information, irritating marketing tactics online. You might as well beg the government to come in and do for you what you would not do for yourselves.
While IMO contracts are less sensitive to production and persistency requirements than GA contracts, there are still some requirements in place. Let’s not throw the baby out with the bathwater. There is nothing inherently wrong with an IMO. I myself have IMO and GA contracts (this is highly unusual). But we remain deliberately ignorant if we do not acknowledge the difference in sensitivity in terms of production and persistency between the IMO and the GA.
In general, an IMO contract is more difficult to get since it has higher annual production requirements (north of $500,000 in base premium per year is not uncommon at all for the agency). Not all companies will issue new IMO or GA contracts. Some may require that interested agents approach a preexisting agency and pursue a downline contract.
The neighborhood life insurance salesman down on the town square that your family has known for years is probably contracted with carriers through the GA channel. This business is typically though not always more intimate. The business may be more about the relationship than a particular product sale.
Again, there is no hard and fast universal law that says this must be so. But think of it, if your compensation is tied to how many policies you sell and whether those policies remain in force, then you will be more likely to take actions to help ensure that those policies remain inforce. But if your compensation is less sensitive to your persistency, then you’re less likely to care about it.
You always get what you pay for.
Now, please, do not take this information and go hammer an agent about the nature of his contractual relationship with the company. Whether the agent regards that information as anyone’s business but his or her’s is entirely their perogative. I’m sharing this with you so you have a better idea of what’s going on, not to stimulate arguments and debates.
Now that we have an entry-level understanding of life insurance distribution, we can turn more closely to the subject of commissions.
The Not So Basic(s)
The unspoken lesson of the prior section is that it is primarily the composition and not the total amount of compensation that differs across IMO and GA distribution channels.
For a given policy, regardless of whether its sold through an IMO or GA, each constituent element of the policy for which a premium is paid will pay cash commission to the agency according to specified commission scales.
For instance, suppose the sale of a life insurance policy generates $5,000 in cash commission. Unless commissions are annualized (a practice I do not personally agree with), then commissions will be paid to the selling agency whenever the policy owner pays his or her premiums. Let’s assume all premiums on the policy in question are all paid at the beginning of the policy year. Then, the full $5,000 in commission will be paid across the agency.
What this means is that, more than likely, no single individual will receive the $5,000 commission. The only time when only one individual receives the total commission on the sale of a product is if he or she has no contractual “up-line.” An up-line is a life insurance agent situated up from the agent who actually sold the policy in a contractual heirarchy. A down-line agent is an agent who contracts with a carrier through an agency contract that is held by an up-line agent. We call the upmost up-line agent the “top-line.” The top-line agent is the natural person or corporation with which the carrier has established its contractual (usually GA or IMO) relationship.
There is a near-infinite number of commission scales, which is to say that there are a wide variety of percentage amounts of various premiums paid to downline agents.
The source of the vast majority of most life insurance agent commission is a percentage of the base premium paid in the first policy year.
A relatively new, downline agent may have a commission scale equal to 60% of base premium paid in the first policy year.
A relatively seasoned downline agent may have a commission scale equal to 100% of base premium paid in the first policy year.
In both cases, the total amount of commission paid by the carrier is the same. What’s different is how much of it went to the agent that affected the sale. The more that is paid to downline agents (and the greater the number of downline agents), the less that is paid to up-line and to the top-line agent.
This structure disincentivizes multi-level marketing corporate structures in life insurance sales. In fact, it is extremely rare for there to be more than three agents in a given vertical silo within an agency, because the commissions are spread thin. Even further, agency contracts often, though not always, outright forbid the addition of downline agents beyond the third or fourth level. Therefore, in a given GA, for example, there may be one top-line senior agent, two down-line seasoned agents, and 10 downline entry-level agents. Or, for an IMO, there may be one top-line contract holder, and 30 downline agents. You get the idea.
A commission scale is not the same thing as a commission split.
A commission split occurs whenever there is more than one agent who is party to the sale of a particular life insurance policy. Under a commission split, an agent will receive compensation equal to a negotiated percentage of his own commission scale.
For instance, suppose there are two agents who agree to split commissions on the sale of a policy. These two agents need not be contractually affiliated through the same IMO or GA, though both agents must have some contractual arrangement with the carrier. A carrier will not send a commission check to a life insurance agent who is not contracted/appointed with that company. In this example, we might refer to Bob who is contracted with Life Co. under an IMO and Jane who is also contracted with Life Co. but under a separate GA.
Suppose that Bob is a relatively new agent, and so was offered a relatively lower commission scale, like 60% (55% is typically the lowest commission scale on base premium across the industry). Suppose that Jane is a senior agent who has negotiated a higher commission scale with her up-line, given her high production and high persistency performance over time. Let’s say Jane’s commission scale is 80%. For the purposes of this example alone, we are talking about commission scales with respect to the base premium. Please keep in mind that there are other commission scales, all of which are significantly lower, for the other types of premium like PUA premium, term rider premium, and so forth. We focus here on the base premium since this is the greatest source of compensation to the agent.
Suppose further that Bob and Jane agree to a 50–50 commission split. They need not agree to this particular split. In fact, since we assume Jane is more senior, it would be reasonable to assume that her negotiated split will be greater that 50%, e.g. 70%. But for now, we’ll keep the math easier with 50–50. In this situation, given the assumed experience imbalance, Jane is being charitable.
What will compensation with respect to base premium look like for this policy?
Bob will receive 50% of 60% of the base premium paid in the first policy year. Put differently, Bob will receive 30% of base premium paid in the first policy year in commission.
Jane will receive 50% of 80% of the base premium paid in the first policy year. Put differently, Jane will receive 40% of base premium paid in the first policy year in commission.
Both Bob’s and Jane’s respective up-line will also receive commission on the sale of the policy. The amount paid to each up-line is the difference between what’s paid to the downline and the amount paid according to the commission scale that the top-line has negotiated with the carrier.
In general, a life insurance company will pay 125% to 140% of first year base premium in total commission to an agency.
Yes, it gets complicated quickly, especially when you assume commission splits, and especially when you account for commissions paid on other types of premium.
Depending on the particular IMO or GA contract, the selling agent may also receive renewal commissions (sometimes called residuals) on premiums of different types paid in policy year two, typically up through year 10. After year 10, if commissions are still paid at all, they are labelled as service fees and are meant to compensate for the provision of on-going service by the agent to the policy owner after the point of sale.
Renewal commissions and service fees may or may not vest.
This one statement alone, if fully understood, would transform the way agents negotiate with companies. I have had occassion to experience new agent contracting with four different companies. Not a single one of them ever said anything about whether the specified commissions vest, and if so, under what circumstances. Literally the only reason I know about this is because James Neathery made it a point to help me understand it.
What does this mean?
It means that some agent contracts are structured so that commissions never vest. That is, renewal commissions and services fees are contingent upon on-going new business production. In contrast, if an agent’s commissions are vested (or will vest at some point under certain conditions), he could, for instance, retire from the business and expect to continue to receive commissions and service fees. Sometimes, residual commissions vest but service fees do not.
It is my understanding that this is the way the old-school, career, independent life agent would build up something that looks like retirement income.
For context, renewal commissions on PUA rider premium may be anywhere from 0–2%. Renewal commissions on level term riders may be 30–80%. These are not hard and fast rules; there are always exceptions.
Intermission
Have I completely confused you yet?
Let’s recap some of what we’ve covered so far.
Independent life insurance agents contract with carriers through IMO or GA type contracts. Each IMO or GA will have a top-line agent and may or may not have down-line agents. The total dollar-value of compensation across IMOs and GAs is not that different across various agencies, but the particular commission scale that specifies the amount paid to a particular agent will vary widely. The exact commission scale for a particular premium type for a particular agent may be the subject of negotiation between a potential down-line and the up-line, but at the end of the day, the top-line agent has final say over the enumeration of the various down-line commission scales for agents in his or her agency.
The composition of compensation varies across IMOs and GAs. The composition is almost all cash commission for IMOs; whereas, with GAs, the composition will consist of relatively less in cash commission (which manifests in lower commission scales, generally) but will also include things like company sponsored trips and regular cash bonuses based on the volume of production and the quality (the persistency) of the business. In some sense, there tends to be more “company involvement” with GAs in the sense that relatively more of the total compensation is sensitive to production and persistency thresholds. Carriers tend to take a more “hands-off” approach with IMOs where initial production requirements may be higher than they are for GAs, but where persistency is less scrutinized, and even when it is, carriers may be lax in enforcing minimum persistency standards, which the particular wording of their IMO contracts allow for (a carrier may have the right but not the obligation to terminate the contract in the event persistency is low but total production is high).
The composition of compensation varies across IMOs and GAs, but the total compensation paid isn’t that different across the industry. By and large, the majority of an individual agent’s commission is calculated as a percentage of base premium paid in the first policy year. Other premium types are associated with other, lower commission scales. An IMO or GA contract may provide for residual commissions and service fees, either of which may or may not vest (and most agents, including the ones reading this right now do not know the vesting status of their own commissions, because not everyone can have the sort of teacher I’ve been blessed with… sadly).
Commission scales and commission splits are two different things. A commission scale refers to the percentage of a given premium type paid as commission to an agent. Commission scales may be negotiated between a down-line agent and an up-line agent, but are the final decision of the top-line agent. A commission split refers to a percentage of the commission scale that an agent will receive in commission. Commission splits are negotiated between the agents who together will facilitate the sale of a policy, sometimes on a case-by-case basis and other times according to industry norms or established business practices, but ultimately each agent who is party to a sale of a given policy has final say over whether to assent to a commission split or not.
With me so far?
Analysis and Interpretation
Now that you know something about the structure of agent commissions, we can address many of the popular beliefs about them.
“Life insurance agents are commission-hounds who just want to make a buck.”
In literally every aspect of society, there are people who participate in economic exchange with bad intentions.
I have learned that the fast-paced, rapid-fire, turn-and-burn, low-to-no service style of financial salesmanship is actually for some people.
Just like Nelson used to say, and as James reminds me, the products in a grocery store are all carefully situated to maximize revenue to the grocery store. The candies and trinkets for sale right next to the register are there for a reason. There is a market demand for that sort of product. And to the grocery store owner, that works.
If an agent can keep a contract in good standing with a carrier by just barely hitting persistency requirements or can avoid contract termination despite failing to meet those requirements, then there might be a reason for that. For some, that “works.”
Frankly, it doesn’t matter whether I or you think that style of business is right or wrong. This is so, because you need not participate in that sort of business if you do not prefer it.
How exactly do you do that? How do you identify and avoid people who are in this business for the wrong reasons?
My suggestion is to attend to the process. Seek structure. What is the form, nature, or pattern of interaction that a new client may expect with a given office? Is there any structure to a new client onboarding process at all? How does the structure sound, how does it make you feel, whenever it’s explained to you? What is the agent’s attitude toward service after the fact? Are you encouraged to work directly with the carrier to meet your service needs or can you expect the agent’s office to help facilitate service needs?
Consider how you might engage with other professionals who you or society perceives to be very well paid. How would you navigate searching for an attorney for an important legal matter? How about a doctor for an important medical procedure?
I would expect you might like to know how things will work with that particular service provider. I would expect you might decline to work with lawyers or doctors who appear disorganized or who can’t wait to get you in the court room or on the operating table (is there a difference?). I would expect you might look through whatever material the lawyer or doctor makes available ahead of time so that you can gauge for yourself, to some extent, whether you might be a good fit for that professional before ever even talking with them.
Since a lot of the compensation paid to agents is calculated as a substantial percentage, relative to other premium types, of base premium in the first policy year, agents who suggest allocating a larger proportion of total premium outlay to the base premium are just commission-hounds looking to make a buck.
This is really the root of the debate in IBC- and IBC-adjacent circles, isn’t it?
Heck, even some of my own clients, who indeed have purchased policies where the base premium is a larger percentage of the total annual premium outlay than the policy illustration-generation software would suggest is absolutely necessary may struggle with this question.
The objection is powerful for a few reasons.
First, it scares the hell out of agents. No one wants to be thought of as the dirty commission hound just looking to make a buck. And the turn-and-burn types love and adore the fact that this objection has proliferated to such a signifcant degree. It is the of the most convenient, accessible, and easy sales tactics ever conceived to generate the appearance of getting you a special deal by “undercutting the competition.”
And let’s not be too casual about this. No one wants to be taken advantage of. No one wants to pay more than he has to for anything. So we understand the that this objection may arise in good faith and that not everyone who’s worried about cost is just plain cheap (though we acknowledge that some people are).
The core fallacy to this objection is the implicit non sequitur claim that some agents suggest larger than (ostensibly) necessary base premiums because it will result in higher commissions to the agent. It is the same old, tried and true, classic confusion of correlation and causation.
Hear me loud and clear: you always get what you pay for.
The problem is the perception that all life insurance agents are the same. That anyone who can find the letters I, B, and C on a keyboard must be doing the same thing as everyone else who happens to use the same letters in the same order.
This is not the case.
It is a fact that by lowering the percentage of total annual premium outlay allocated to the base premium, you will reduce PUA premium longevity.
This means that the less you pay in base premium as a percentage of total annual outlay, the fewer the number of years over which you can expect to pay the PUA premium. I refer to the idea of the number of years over which you can reasonably expect to pay PUA rider premium as PUA longevity. The lower the base, the lower the PUA longevity.
Period.
Eventually, in order to maintain preferable non-MEC tax status of your policy, anti-base premium policy designs will accept fewer — potentially much fewer — total premium dollars over your natural life, should you live to, around, or beyond natural mortality. This will mean lower cash values, death benefits, and dividends over time. This will mean less capital available for passive, tax-free cash flow in your Golden Years. This will mean fewer premium dollars payable to your older — and by virtue of being older, necessarily more efficient — policies over time.
Lecture 6 of my Whole Life Insurance Mechanics series, which is free on YouTube, provides an example and counter-example based on a real-life client of mine to explain this in detail.
One of my many mistakes in this business has been, in the past, to characterize the short-term-minded, maximum cash value right now, style of policy design as “wrong.”
It isn’t inherently wrong.
It is for some people. People buy candy bars at the grocery check-out, and I have not one iota of ground to stand on to judge that individual.
The fact is that I and that other individual want different things.
Look, I teach and sell policies according to what Nelson Nash taught. And I have specific ideas of what that means. I think Think Long Range and Don’t Be Afraid to Capitalize mean what the words directly indicate. I think that when I’m in policy year 20 and I see my cash value growth in that year exceed the amount of my total premium outlay by a factor of two, that future-Ryan would probably like very much to be able to pay that premium, in order to support that pattern of cash value growth, and to preserve the contractual right to do so in a tax-favorable fashion for as long as possible.
But that’s me. That’s part of my extended understanding of what Nelson Nash was teaching. That’s how I design policies for my own purchases. That may not be what you want and it may not be what someone who is primarily concerned about commissions wants.
Someone who is primarily concerned about commissions may see the illustration — the assumption — that PUA premiums can be paid for 20–30 years on a 10–90 or other anti-base premium type policy and immediately jump to the conclusion that just because the policy illustrates that way now, that that’s how it will perform in the future.
That conclusion is untenable for a variety of reasons. Dividends will not be exactly as illustrated. You may or may not pay the premiums precisely when the company assumes that you will, every year, for the rest of your life. If the policy is treated with direct recognition and you run a loan balance through a Policy Anniversary even once, you yourself will cause dividends to be lower than illustrated in the current year and in every future year, since cash value growth is a compounding process where future growth depends on the magnitude of past growth. If there’s any form of annually renewing term rider on the policy and anything happens in reality that diverges from what was originally illustrated, then what’s illustrated will not happen. Whether and to what degree real life events like these affect the tax-treatment of the policy, flexibility in premium payments, or PUA longevity will be matter of just how low the base premium is and just how widely reality diverges from the initial assumptions. The lower the base and the greater the change, the more likely one will trigger meaningful consequences.
Now, if you are of the view that premium is a cost to be minimized, that everything in the future as it pertains to the policy you’re about to purchase will go exactly as assumed and illustrated, that agents are commission-hounds, and especially that agents who suggest more than what the illustration software would suggest is strictly required today based on the assumption that the future will be an exact replica of the present, then allocating a substantial percentage to base premium is probably not what you’d want to do.
And that’s OK!
My own position with respect to that latter set of beliefs is, frankly, contrary. We will not be a good professional fit for someone who approaches the purchase process with those preconceptions. Someone who shares the anti-base premium philosophy will not be well-served by my office. Those preferences are better addressed by others in this business.
Why is that?
Because I have clients who have the anti-base premium type policies that they’ve received from other agents. I assist those clients with their service needs, even though I’m not the writing agent on those policies. Usually, this looks something like an orderly drawdown. We often must carefully plan to reduce premiums down to minimums earlier than originally illustrated in order to preserve long-term MEC status. We keep these policies from blowing up — blowing up in the sense of causing an unexpected MEC trigger. Virtually never do I suggest selling or surrendering the policy unless the circumstances are so severe that there is no other option. I am involved in a situation just like this as we speak, where another agent introduced me to a client of an enterprise that you would recognize if I said the name, where the client is so scared of what could happen with the policy in the future, given her recent, actual experience with it, that she cannot wait to get rid of it.
This is an example of the eventual aftermath for some of these anti-base premium policy designs.
And then people wonder why I get indignant or fired up on the Banking with Life podcast.
Now, will everything be literally always and forever perfect if all this particular individual did differently when first buying the policy was allocate more of the total outlay to the base premium?
Obviously not. And maybe her’s is a situation where the anti-base premium design was in fact well-suited to her circumstances, and maybe the source of concern now is some other aspect of the policy purchase process and maybe no single individual is deserving of any blame whatsoever.
That’s all possible. And there’s never a problem, until there’s a problem.
And the online social media trolls can whine and complain with their allegations that all I do is sow “Fear, Doubt, and Uncertainty” to their heart’s content. Because stoking fear that if the individual does select a more substantive base premium in the design process that they’ll just be getting taken advantage of doesn’t sow Fear, does it? Or, because stoking doubt by questioning the ethics of the someone who maintains a professional disagreement doesn’t sow doubt, does it? Or, because stoking feelings of uncertainty by challenging outside claims with non sequiturs doesn’t sow Uncertainty, does it?
Give me half a break.
Oh, but let’s go all the way in, shall we?
Recently I had occasion, at the tail end of a lengthy advisory process which consisted of three different hour-plus-long advisory calls, in addition to an extensive introductory call in addition to time spent analyzing his financial data, to preemptively end a meeting where the young man asked me the following (I’m paraphrasing, but this is close):
“I’ve been watching some things online and I think what I’d really like to know is what all of the costs and fees are here including the specific agent commissions paid in each year on the illustration.”
First of all, this document — whatever he was referring to — does not exist.
And yet, I explained some of what I’ve explained in the first and second sections up above. I explained that I do not and will not, under any circumstance, disclose my own commission scales. That is my private business and personal information. I do not inquire about the percentage composition of my clients’ or of colleagues’ or of other professionals’ income, and I will not be made subject to that examination by others.
The young man would not relent. And maybe it’s my own feelings of inadequacy — hey, I will happily accept every bit of responsibility I should — but, whatever the ultimate reason, it became clear to me that this individual would not be a good fit for my office.
I’m sure that a significant reason that this particular relationship did not work out is attributable to the complete void of good information on the subject of commissions in the life insurance business. Perhaps this essay will help remedy that in the future, and of course, we still wish the young man well.
This situation is emblematic of broader trends in the industry.
Life insurance agents don’t want to disclose the specifics of their compensation because it’s their business and some consumers think that this refusal to be as transparent as Casper the Friendly Ghost constitutes some sort of slight to the consumer, as though the consumer is entitled to this information. And you might understand why! If compensation paid to an agent is a cost, and if there’s a fixed pie of economic benefit, then it must be the case that higher commissions mean higher costs and therefore less benefit to the consumer. The consumer is losing something because the agent is gaining something.
In economics, we call this the Zero Sum Fallacy. It is by now an ancient logical fallacy that fails to understand the concept of mutually beneficial exchange whereby two or more parties to a transaction all benefit. The consumer, agent, and carrier are all better off as a result of the exchange.
What does not serve the best interest of the consumer (or the company, or the agent) is permitting the illusion that merely by punching different numbers into the keypad and lowering the base premium relative to the perceived “competition” is some special, magical solution that will necessary result in superior long-term benefits. In fact, it could be that this is the way to do exactly the opposite and to prepare the situation such that it may only be a matter of time until something goes wrong.
It could be the case that the sort of second, third, and fourth order consequences of meaningfully realistic and therefore analytically relevant future possible events warrants a more resilient policy design. It could be the case that that’s what some people actually want.
On the Attitude of Entitlement to Commission Splitting
This one gets its own special section.
A very small minority of folks who engage with my office in order to pursue whole life insurance who consist of licensed life insurance agents or of people who want to become licensed life insurance agents demonstrate what I can only call a sense of entitlement to commission splitting.
The idea goes like this.
“I’d really love to get a policy with you and I love everything that you put out and it’s been so helpful so I really want to work with you… But I’d like to get my agent’s license so we can split the commission on my policy and so I can write policies for my family.”
I choose to believe that this sort of question comes from a place of genuine good faith and some innocent naïveté.
In my weaker moments, this sort of question sends me into a complete spiral, which in and of itself is an opportunity to be grateful for the chance to work on my character defects.
The last time you went to the doctor, did you inquire about about getting your medical license so you could split the insurance reimbursement with the doctor? Did you discuss your plans to join the State Bar in order to share revenue from the provision of legal services with your attorney? Or maybe your real estate license in order to split the commission with your Realtor?
Or there’s another way to think of it. How much of what you pay to any service provider or goods vendor do you think is too much? Is there a specific percentage?
These questions are intended to be cheeky and provocative. Hey, the last time someone questioned the legitimacy of your income, I’m sure you raised some cheeky questions too!
Perhaps what’s going on here is the perception that the life insurance business is just that easy. All we do is type some things into a computer and out spits an illustration and then premium gets paid and then these dirty commission hounds get these fat commissions. And surely, since the consumer is (ostensibly) presenting the agent with business he otherwise would not have had, the generation of a partial commission payable to that agent is still greater than zero, and so the individual who wants a cut of the commission is actually presenting the writing agent with a gift!
The error in this line of thought is the improper selection of the counter-factual. The tradeoff is not whether the agent stands to make some or no money in facilitating the sale of a life insurance policy. The tradeoff is whether the opportunity cost of that agent’s time, effort, and energy, is more or less than the reduced commission that the consumer would like for the agent to be paid.
Therefore, what the consumer is actually doing is not presenting a special gift to an agent where before there was no value to be had. Instead, he is asking for a special discount compared to everyone else on the expectation or belief that, apparently, he has brought something to the table that other people are not.
One might understand how this approach would be effective with an insurance sales office engaged in the active, paid marketing of their services, where there is some “cost of acquisition” of a new consumer. One might conceive of a situation where the split commission to the consumer (in the event he went through the licensure process) is less than the agent’s usual new client cost of acquisition.
After all, there are agents out there who will agree to do this!
Consider the profile of the hypothetical agent who may be willing to do this.
We’ve just established that the proper tradeoff to analyze is the amount of (reduced) commission the agent still stands to gain by assenting to the commission split versus the opportunity cost of this time, effort, and energy.
We can theorize that the agent who is more likely to assent to a commission split is therefore one with a lower opportunity cost of time, effort, and energy. The lower the value of the next best alternative that the agent could attend to, then the more likely it is that the (split) commission will in fact exceed the (low) opportunity cost. A lower opportunity cost, in this sense, constitutes a lower, more easily overcome obstacle to proceeding with the transaction and agreeing to the commission split.
Do you see where this is going?
The agents who are most likely to assent to commission splits are the least productive, or they are contradicting economic reality and purposefully depriving other clients who do not expect to be paid money in order to become a customer.
For this reason, commission splitting is more common in mentorship arrangements between a senior, mentor agent and a junior, newbie agent. The new agent, by virtue of being inexperienced, is not very productive (if you want to be technical about it, they generate a relatively low “discounted marginal value product”).
Even then, I still disagree with the commission-splitting method as the compensation mechanism for a senior, mentoring agent. The commission split is still too low relative to a productive, experienced, senior, mentoring agent’s opportunity cost, unless, of course, you select a low marginal-value productive mentor.
No, the proper mechanism for compensating mentoring agents on a sustainable, on-going basis is not through commission splitting. It’s through agent contracting. That is, it’s not in the commission split, it’s in the commission scale.
Not knowing this, many new agents are both downline agents to senior, mentoring agents and the senior agent takes a commission split. People can do what they want, but I find this is excessive.
Returning to the agent-client interaction, I suspect that to some extent the practice of permitting clients to get licensed so they can get a commission split on the share own policy gets real close to idea of rebating, which is an illegal practice and grounds for suspension of an agent’s license to sell insurance. You can check out Section 4005.053 Certain Payments Prohibited To Or From Person Not Holding License for yourself.
The implication is clear. The proposal that the new potential client get a license so that he or she can participate in the commission paid on the sale of the policy is nothing short of getting around illegal business practices.
Fun!
I’m sure you noticed my rather firm note at the start of this essay regarding commission splits to agents who are currently licensed.
Understand that what I hear a licensed life insurance agent say to me when he proposes that I split commissions with him is that he thinks the value of my interaction with him exceeds my opportunity cost.
This is not the case.
Conclusion
Of course, I understand that some readers will be encountering this sort of perspective on life insurance agent compensation for the first time.
I understand that the views expressed above may come off provocative or off-putting or offensive.
Please know that no insult or offense is intended.
However, the casual regard that sometimes manifests as entitlement towards the commission of a life insurance agent is inappropriate, just as this attitude would be inappropriate with regard to the reader’s own finances.
That said, I also understand that there’s little to no good information about how life insurance agent commission works. The ironic unspoken secret is that many life insurance agents don’t know how their own commission works.
At the end of the day, I believe that autonomous, productive, free men and women embrace the fact that every man is worth his hire, that there are no shortcuts in life but only the false appearance of them, and that those who participate in a new client advisory process most often do so in genuine good faith and just want to know how agent compensation works.
Hopefully this essay sheds light.
