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.