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.