A big part of our strategy for helping clients build their wealth and dreams starts with leveraging life insurance. Here’s the thing: Insurance companies dictate how much we are paid. We have no control over that. It is a fixed amount that is embedded in the contract, and we cannot change it.
Believe me, we’ve tried. At one point, we actually contacted the Iowa Insurance Division and asked if we could just give the commission to the client. That was a hard “no.” The Iowa Insurance Division made it clear that giving back the commission to clients would result in losing our license.
Our main job, as we see it, is to educate and advise. We sell an insurance product in the process, but our secret sauce is in educating you on options in how you use that product. We get paid to educate, inform, and provide options and finally to facilitate insurance contracts for our clients.
The Specifics on Commission
There are typically three layers within a life insurance product that generate a commission: base premium, paid-up additions (also called “overfunding,”) and term insurance if it is blended in. For our purposes here, we’re going to focus on premiums and paid-up additions.
The reason we suggest that clients “overfund” is because it is more efficient in building cash value in the policy beyond the base premium. To get a detailed explanation on how cash-value can be leveraged, read this post on the subject. Most agents are taught to price life insurance by showing their potential clients the most amount of death benefit for the lowest premium payment. Our strategy is the opposite of that. We suggest buying the least amount of death benefit, but overfunding the policy so you can use the cash value on that policy to grow your wealth and make use of it while you are still alive and well.
So, depending on the carrier, we are paid about 90% of the base premium as a commission. So, if your base premium is $5,000 a year, then that first year we would get a $4,500 commission. Now, if you overfunded that contract with an additional $10,000 of paid-up additions, most of that money is accruing to cash value immediately and we are paid 5.6% on that $10,000 or $560. The total commission on that policy would be $5,060. Then, in years 2-3 we get an 11% commission on the base premium and after year 3 we are paid 5% of the base premium into perpetuity by the carrier.
We tell people that the difference you pay in premium in year one versus the cash value available in year one is typically about what the agent is getting paid in commissions. In other words, either way, we receive a commission of around $4,500 to $5,000, but when you overfund, you’ll be able to use that dollar amount in cash value right away. Imagine using that money to pay down debt, invest in property, or purchase a car. It is basically a loan from you to you.
We say all of this to give you a picture of why we structure things the way we do. We’re paid no matter how you structure that insurance policy but we want the policy to work to your best advantage.
By putting nearly 2/3 of the premium into paid-up additions, we are actually limiting our commission and getting you, as the client, the most amount of cash value up front available in year one. This also shortens the break-even period of the policy. So, if we overfund during, say, the first 4-5 years of the policy, that puts you in a position where the policy cash value should be close to the amount you have put into it. Pretty soon, the contract turns into an investment. Meaning it is worth more than you have contributed and this is where compound interest starts to really kick in and your money is working for you. We get paid and you have excellent options for leveraging that cash value – a win-win!
Getting paid, yes. We’re all for it. But in the process, we want to give you the most opportunity to increase your wealth and make choices about your future. We hope that helps you understand how we get paid and how you are benefited in the process. It’s just how we like to do business!