How Do Life Insurance Commissions Work?

“How do insurance agents get paid? How do commissions work? That question comes up all the time, and it’s natural to ask. If you’re working with us, I mean, we let everyone know here’s exactly the commission. Here’s what we’re paid, full transparency. We believe in that.also check out how to use life insurance while alive

But if you’ve ever worked with someone and say, “Okay, like how much are they making off of this?” Or “I want more information,” but it’s tough to get it from my agent. Maybe my agent yelled at me, I know that sounds like, what? But I can’t tell you the amount of times we’ve seen that where people have reached out and said, ‘Yeah, I asked my agent about how commissions work, how do they get paid and they just flipped out on me.’ Like, that never made sense to me because it’s like, how can you do that to someone? Like, they’re giving you their money to open an insurance policy with you, and you will make a commission. Like, don’t yell at them because they’re finding out how low the premium, which lowers your commission. Like, no! Get lost, don’t do that kind of stuff.

Anyway, I’ll get back on track here. So how do commissions work in the insurance industry? With a traditional whole life insurance product, taking a traditional here, there are so many different products. If I take a basic whole life insurance product, my money can go where? Two primary areas. Towards the base premium or the PUA, which stands for paid-up additions Rider. Commissions are different in those two areas. Base premium dollars typically do not show up in cash value in the first year, and first and second year depends on the product. PUA dollars show up in cash value, money I can access right away, and accelerates the growth.

So what’s in the best interest of the consumer if cash value is their goal? The PUA component. Especially when you look at the guarantee values. Now, with that said, how do the commissions work on those two areas? Base premium first. So if I take a traditional product, let’s assume that I have a $10,000 base premium. The insurance company and product, I should say, the company and product will make a difference here. If I look at some of the larger companies or companies that solicit business in the state of New York, you will see on that $10,000 premium the commission will range anywhere from 50% to a maximum of a little over 90%. Let’s just call it 50% to 90%.

If the company does not solicit business in the state of New York, then that commission will range anywhere from the same 50% all the way up to 135%, huge difference there. That’s because New York state does have regulations as far as how much commissions can be paid out. And to be clear here with this New York state thing is if a company solicits business in New York, they have to abide by these commission restrictions in any and all states. So if I live out in California or any state and I work with a large company like Mass Mutual, Guardian, New York Life, and Northwestern Mutual, the agent that receives a commission will be between that 50% and 90% range. Depends on the product and again what they’re paying.

So $10,000 base premium. Let’s use a high-end number of 90% commission in the first year. That’ll be what? $9,000 based off the base premium. There are renewal commissions years 2 to 10. Typically, the average renewal is 5%. So if I’m using a large mutual carrier that solicits business in the state of New York, on the base premium $9,000 on the premium year 1, Years 2 to 10, the same $10,000 base premium, we’ll assume it’s still being paid, $500 is typically paid out if it’s a 5% renewal per year.

If I’m using a smaller carrier that does not run business in the state of New York, what would happen there? Year 1, $13,000 paid in commission if I have the same $10,000 premium. And on the renewal, typically I’ve seen them higher than 5%, typically between 7.5% to 10% on the renewals, so a bit richer there. But we can assume it’s the same 5% in this example at $500 per year. The first year on the base premium, that’s the primary commission there.

PUA dollars, the second area. So if I paid the same $10,000 to a PUA Rider, which I see in cash value right off the bat, almost all of it, I will receive as an agent anywhere from 2% to 3% commissions. Sometimes we see 3.5%, usually it’s with a smaller company that, again, do not have the right in the state of New York, but call it 2% to 3% per deposit. And this is not a fee that comes out of your cash value and goes to the agent. This is what the insurance company pays to the agent for that business coming to them as the insurance company. It’s good to be aware of that.

So the main thing there is how compensation works on the base premium and PUA area? Now, when we design a policy for maximum cash value, what do we always do? Minimize that base premium. What that does is, aside from compensation when you just look at the numbers, you’ll see the lower the premium, the greater the cash value short term and long term. There’s this argument we see sometimes that the higher base premium can potentially result in greater dividend over the long haul. It’s true, it’s potential, but we’ve never seen it actually happen. In reality, we’ve seen products typically perform closer to the guarantees or if they perform at a high level, the minimum premium policy always generates greater cash values for the consumer. That’s been a consistency there.

So if a policy is designed properly like the example we see here up on the screen, what do we see? Minimum premium, minimum commission there. So we’ve got the full disclosure on the commissions, that’s actually a 93% commission there with that particular product and company. Minimum premium compared to a product with a higher base premium. Look at the benefit for you as a consumer. Less cash value all the way through, greater compensation is paid out. It’s not to say that high base premium always results in negativity to the agent, hey, this is just wrong to do, but in the majority of cases, we see this occur.

So I hope that this provides some additional information and transparency. If you have any questions, feel free to reach out anytime. And as always, I hope this helps.

Hey guys, Steve Parisi here. If you enjoyed the content you just saw, please subscribe, like, and hit the notification bell for future videos. If you’d like more information or to see some custom policies for yourself, feel free to call or email our offices at the contact information below.”