Fee Only Life Insurance

You may be surprised to learn that the commissions on life insurance policies can easily be more than the first year’s total premiums. For example, 20 year term life insurance for $1 million on a 50 year old might cost about $300/month or $3,600 per year. Well the commission generated would be closer to $4,000 to $5,000 that gets paid once the policy is signed, sealed and delivered. The insurance agent would then receive roughly between 40% and 100% of that amount depending on his or her arrangement with the firm they work for. Yes, you read that right – the commission may be much higher than the first year’s total premiums. On top of that, the ongoing annual commission can be 5-10% per year (of annual premiums paid).

Something that exists in the United States, that is nowhere near being on the radar here (I only heard of this myself on Tuesday night!) was the availability of fee only life insurance. Prices on policies are dramatically lower, and for permanent types of life insurance there can even be instant cash values generated since the agent’s commission could be used to overfund the investment component right off the bat.

Agents’ commissions can be reduced by 85% and this has the effect of increasing the internal rate of return of whole life policies by a full 1% per year. If you have been following the personal finance blogs for a while, you’ll know the importance of 1% per year.

Fee only life insurance agents may charge a flat fee or an hourly fee and other agents may just offer to reduce the commissions instead of opting for the maximum available rate – all three are options that are not available in Canada. In the interests of true fiduciary responsibility – the option of unbundling the fee from the product should be similarly available north of the border.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • paragonwealth

    I enjoyed your article. Good tips about life insurance. It is so important to have.

  • Brian Poncelet, CFP

    Hi Preet,

    You should also be talking about disability insurance. This is a topic many insurance agents don’t talk about yet there is a huge demand and need. When compared to term insurance (for disabilities over 90 days) in many cases one has a 8x better chance of a disability claim than death! Since this topic does not get raised by financial planners…investments are easier to talk about!

    This explains why many policies are sold over the internet, instead of face to face across Canada. If you want some information your readers could use feel free to drop me a line.

    regards,

    Brian Poncelet, CFP

  • Preet

    Hi Brian, thanks for commenting. I have indeed written about Disability insurance before, although the old posts have not been re-categorized since the the upgrade to the website. However, I have linked to two articles below for anyone who wants to read more.

    Also, Brian – if you would like to make a guest post on disability insurance in your own words, please do feel free to send me an article – always looking for good content!

    http://www.wheredoesallmymoneygo.com/what-is-disability-insurance/

    http://www.wheredoesallmymoneygo.com/why-disability-insurance-is-the-most-important-insurance-to-have/

  • Terry

    It is surprising how much dealers and the large companies make on insurance, but there are alternatives. I found this that website takes the dealer out of the picture and YOU save instead: http://www.termchoice.ca/ — try the quote calculator, you won’t believe how much you can save.
    I’ve invested my savings and I am starting to see some real returns.

  • Brian Poncelet, CFP

    Hi Preet,

    Here is your laugh for today “Veronica” who is related to “Terry” said almost the same comments within a few hours of each other on another site, http://www.milliondollarjourney.com

    With out going into details term is a tool and is great for some people but is many cases like a family business or cottage term is just not going to help.

    I came across Blue Cross mortgage disability plan. (All Blue Cross Member Plans in Canada are operated on a not-for-profit basis).

    As you know disability insurance is very important. For people who are self employed this may help because of their low income even though they have a large mortgage. I will try to get you some info on this and maybe a powerpoint if you think it may help.

    regards,

    Brian

  • The Term Guy

    I don’t believe there are fee-only life insurance products in Canada – and I’m pretty sure they’re as rare as hen’s teeth in the US too :).

    However some life insurance companies have large case departments where they’re able to reduce commission and as a result premium, on a case by case basis. Nobody’s going to do that for you on a $200 a month premium, but if sufficiently large some agents will take a commission cut to get competitive pricing.

  • The Term Guy

    Oh; one other thing. I’m not 100% sure that reducing commmissions on life insurance is going to make that large of a dent in premiums. And if it does, I expect it’ll be less than most folks would expect.

    Some of the important things that actuaries look at when pricing life insurance are things we wouldn’t expect – like expected future costs and lapse assumptions. Making the assumption of lower future costs will have a noticeable effect on pricing. Assuming that a large number of policies will lapse instead of having to pay a death benefit can effect premiums as well. If you assume 2 people in a 1000 are going to own life insurance when they die, that’s one premium. But if you assume that only one person in 1000 is going to own the policy when they die because the other person cancelled before they died – well you can see that paying one less large death benefit can have a huge impact on the premiums.

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