Is Your IMO Screwing You Out of Commissions?
If you have not ready my IUL Commission Handbook (a must read), click here to do so.
Many advisors after reading this newsletter will be upset. If you are one of them and want to work with an IMO that is transparent about the commissions available and will treat you fairly when it comes to what you get paid, email me at email@example.com and I’d be happy to refer you to the IMO I work with and trust.
I learned the hard way when I got into the business back in 1999 how unscrupulous GAs and IMOs can be. Many of them know exactly how to take advantage of agents and I was certainly one of the gullible ones when I first started.
When I first got in the business I didn’t even know what “target premium” meant on a life insurance sale. I focused on the product and what was best for the client and figured I’d get paid fairly. I was wrong.
Back in the day I made some large life sales and I found out about a year later that I was woefully underpaid. I was underpaid because of my own ignorance of the system.
It’s ironic that one of my roles in this industry is to educate advisors about not only how to give the best advice to clients, but which IMOs to work with and which ones to stay away from.
I’m going to pull back the veil on a payment trick some IMOs use to put one over on ignorant agents (like I was) when it comes to paying commission on life insurance sales.
When selling life insurance, is it better to have a 100% contract with an IMO or an 80% contract that pays a first year bonus of 25% of the target?
Let’s look at the numbers. If the target premium is $5,000 (assume the total premium paid by the client annually is $10,000), a 100% contract would pay a first year commission to the agent of $5,000.
What would an 80% contract with a 25% bonus pay? It actually would be slightly more than the 100% contract would pay. Let’s look at the math:
.8 x $5,000 = $4,000; 25% x $5,000 = $1,250; $4,000 + $1,250 = $5,250
Which would you rather have? Most agents would logically say an 80% contract with a 25% first year bonus because it pays $250 more.
Why is this the wrong decision? In a few words….excess and renewals commissions.
If you don’t know, life insurance sales pay agents renewal commissions in years 2-10 if the policy stays in place. That commission is only a small fraction of the original target, but it can certainly add up over time.
I pulled the compensation grid at two of the top IUL companies. They were both pretty similar.
Guess what the renewal payment is to the agent contracted with an 80% contract? 0.75%
Guess what the renewal payment is to the agent contracted with a 100% contract? 2.75%
Using my example, the annual renewal commission for the 80% agent would be .75% x $5,000 = $37.50
The 100% contacted agent annually would be paid 2.75% x $5,000 = $137.50
The 80% contracted agent after nine years is paid $337.50 in total renewal commissions.
The 100% contracted agent after nine years is paid $1,237.50 in total renewal commissions.
Now which one do you like better?
Who keeps the extra renewal commissions that were not paid to the 80% agent?
Take a guess? The IMO.
Also, let’s not forget about excess premium. Not all premium is target (or it shouldn’t be). So in my example, I’ve got $5,000 excess premium that is not target.
Most insurance companies pay agents a commission on excess premium. Many times it’s the same amount as the renewal commission.
So in my example, the 80% plus bonus agent only received .75% on the first year’s excess and .75% on the excess premiums in years 1-10. $37.50 x 10 = $375.00
The 100% agent received a 2.75% commission on excess premium. $137.50 x 10 = $1,375
So, the total compensation disparity in my example is:
80% total compensation = $5,250 base commission; $337.50 in renewal commissions; $375 in excess commission for total of $5,962.50.
100% total compensation = $5,000 base commission; $1,237.50 in renewal commissions; $1,375 in excess commission for a total of $7,612.50.
The difference = $1,650 (27% increase)
So, now you know.
Also, for the record, I’d like to state that “average” agents that don’t put in much life business (say a few cases a year) should be on 80% contracts.
However, if you are a good producing agent that puts in a decent amount of cases, you should be at 100%+ and then in turn you would be getting paid higher renewal commissions.
Roccy DeFrancesco, JD
Founder, The Wealth Preservation Institute