Over the next few weeks our podcast will look at five of the most common myths people have regarding life insurance. In particular, we're looking at those myths that attack cash value life insurance and the evil people (us) that sell it.
If you want a preview of each topic, you should head over here to see the “Top Five Arguments…” and the links to a more in-depth explanation of both.
What we hope to do in the podcast is to expound a bit more on each one.
Outrageous commissions paid to agents
As you've probably already guessed…today's episode goes after the “Agents are paid too much commission” argument. This is one of our favorites to discuss.
We've seen a lot of “authorities” speak about about outrageous commissions paid to life insurance agents when they sell you a permanent life insurance contract (whole life or universal life). Things like…”Did you know that your agent made 90% commission on the policy he sold to you?”
That could be true…
But 90% of what? That should be your follow-up question.
The truth is that insurance agents will probably make something between 55% and 100% in first-year commission on a permanent or cash value life insurance sale. But you need to understand, that's on the base policy (whole life) premium or the target (universal life insurance).
And that is paid only in the first year.
In our case, with the design intention of growing cash value as quickly as possible, the base premium and/or target premium are the smallest portion of total premium that a client is paying. So yes, we may get a high percentage commission but that's on the smallest portion of what our clients pay in premium and it's only for the first year.
The additional/excess/paid-up additions premium pays at a much lower percentage. It's hard to nail down precisely but it's about 2.5% on average.
But why does it matter?
That's the question you really need to ask yourself. Why do you care how much your agent makes? I don't know about you but I don't wander into the hardware store and speculate as to what the gross margin is on the box of nails I need.
Frankly, I don't care.
I have two boards that need to be nailed together. The guy that owns the hardware store (Bob) sells nails. This means that Bob has the solution to my problem and I'm happy to pay him for the solution.
Not one time do I ever think to ask…
“Hey Bob, what's your cost on this box of nails? See, I wanna make sure you're not making TOO much money.”
I suspect that if I were to say something like that to Bob (owner of hardware store), he'd laugh hysterically and then kick me out of the store.
My point here is that if what you're buying from someone serves your purpose and it does so to your satisfaction, why do you care how much money the person selling it to you is making? This is not a zero-sum game, and just because you know his/her gross commission doesn't mean that the agent is putting all that money in their pocket.
Remember, they are running a business as well…which means they have to pay staff, taxes, overhead etc. just like every other business.