Of Interest to All Insurance Agents

By Dr. David Edward Marcinko MBA MEd CMP™

Sponsored: http://www.CertifiedMedicalPlanner.org

According to colleague David K. Luke MIM, MS-PFP, CMP™ the current structure of the life insurance industry regarding cash-value life insurance policies with most major insurance companies is to reward the selling agent with the entire commission upfront on a newly issued policy. The criticism to this practice is that this of course reduces the needed client-agent reviews and interaction and generates more “churning” and “flipping”. Unscrupulous agents are tempted to sell physician-clients another policy for another commission rather than encourage them to maintain and keep their existing policy, which most likely would have lower costs than any new policy considering the client was younger and most likely in better health with the existing contract. A model in which the insurance agent would have a financial incentive for their client’s continued patronage could create a win-win for both parties. We see this “pay as you” model currently operating successfully with wealth advisors and property/casualty agents, why not life insurance agents [personal communication]?

There are some flaws to this argument. The reality is that the captive life insurance industry and their agents prefer this form of lump compensation. The claim is that selling an individual a life insurance policy (the ultimate intangible product) is hard work, and likewise the 70% – 110% of the first year premium is fair compensation for the efforts. For existing agents to reduce their current income to a fraction of this commission upfront, but convert it into a trail over a multiyear period is actually quite distasteful. Therefore, this change will likewise not be initiated from the Insurance agent or insurance industry side unless other forces prevail.

The drive by the consumer to change this up front lump form of compensation has not yet presented itself in full force. After all, why does the consumer care about how the agent is paid if the consumer is satisfied with the end result? One must acknowledge that the drive to reduce commissions and up front loads in the investment advisory business was driven by the consumer that insisted on lower fees and costs.

However, the relevant costs of a life insurance policy are not quite as obvious. Only by comparing a quote from different companies can a consumer compare costs, and even then it is unknown and not understood how the pricing mechanisms used by the insurance company work. The advent of non-agent sold policies however is decreasing the cost of life insurance (there is no big commission check written to the selling agent) and is hitting the radar of consumers. The consumer can notice this difference if the consumer compares the proposed agent sold policy premium with one sold directly by a financial institution such as USAA or AARP. These companies have a work force of sales people that are compensated primarily on salary. Likewise the company can structure more competitive pricing, and in effect offers a levelized cost (in place of commission) insurance product.

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For example, Mark Maurer CFP® of Low Load Insurance Services believes that a levelized compensation basis will not occur unless all the insurance companies were to go to such a plan all at once. If an agent can “pick and choose” he/she may use a “levelized compensation” policy when in a competitive situation, as such a policy should in theory make a policy more inexpensive. An agent would then use the higher “front-end” policy when there is a large up-front premium or in a scenario with limited competition. Mark believes the answer to the whole argument is full disclosure. Both agents and home offices would not want the purchaser to know that 100% or more of their premium is going to sales costs and then products would then get better [personal communication].

The insurance industry has a powerful lobby in Washington. Only market pressure will cause a change in this decades old insurance industry practice that has made many life insurance policies expensive and inefficient. Pricing from non-agent sold life insurance companies will be the impetus that drives the old-line Insurance companies to restructure their commissions to agents.

Insurance agents also remember the days of 8% load mutual fund commissions and minimum $60 dollar commissions on stock trades in the late 1980’s! That is an inflation equivalent of more than $130 per trade, minimum commission, today. The current investing world would laugh at these costs [charges] today. When the physician-consumer realizes, through full disclosure and outside competitive market pressures, that life insurance protection can be more affordable from other non-traditional channels, then s/he will insist on a better, more affordable product.

Textbook Order: https://www.amazon.com/Comprehensive-Financial-Planning-Strategies-Advisors/dp/1482240289/ref=sr_1_1?ie=UTF8&qid=1418580820&sr=8-1&keywords=david+marcinko

Ultimately, the big agent driven life insurance companies will have to change their commission structure. The transition is currently in process. Only time will tell now [personal communication].

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