The Elephant in the Room: Let’s Talk Commission…
It’s no secret that insurance advisors earn commission on the Life Insurance policies they sell, but the exact details of how this works are often hush hush. That’s because there is no industry regulation demanding that advisors disclose how much compensation they earn from a specific policy. Unless a client asks, most advisors won’t share this information.
We recommend everyone ask their insurance advisors to disclose the amount of compensation they’re receiving, but at Cove, we inform our clients of this information upfront. We believe there are key pieces of information that everyone is entitled to, and our philosophy is to share this information with our clients.
How Compensation Works
Life Insurance compensation is paid by commission on the sale of Life Insurance in Canada. It not only provides a revenue stream for advisors, but it also helps offset overhead expenditures and accounts for ongoing servicing of client policies. (For more information on how the compensation structure works, please click here.)
Life Insurance compensation is made up of three parts:
- First Year Commission (FYC), which consists of the basic compensation of a Life Insurance policy
- Additional Compensation, determined by the total amount of insurance an advisor sells with all companies
- Renewal Commissions: annual commission that may continue for the life of the policy
When asking your advisor to disclose compensation information, it is important that all types of commission be included.
A Note on Whole Life vs. Universal Life commissions…
Whole Life insurance pays significantly more commission than a Universal Life insurance policy. Universal Life insurance policy is approximately 50% of the compensation paid on a Whole Life policy.
|PLAN||WHOLE LIFE||HYBRID LIFE||UNIVERSAL LIFE|
|Premium (10 Pay)||$45,111 x 10||$45,111 x 10||$45,111 x 10|
|First Year Commission||$41,770||$21,223||$20,443|
Cove does not sell Whole Life policies because of the poor performance relative to other permanent insurance options available. In our opinion, Whole Life is not consumer accountable. (To read more about why we do not sell Whole Life, click here.)
Earned Versus Paid Commissions
To prevent the overpayment of commissions, insurance companies have a system to charge back unearned commissions, if the client cancels their insurance policy within the first 3–5 years of the policy being in force. This is known as the chargeback period, and it varies based on the company and type of product.
We refer to the amount of commission that is no longer subject to being charged back as earned commissions.
Policy Option 1
End of Year
Charge Back Liability
Cove discloses both the paid and earned commissions on all insurance policy options presented in a Continuity Advisory Report. All commissions shown are maximums and may be less than illustrated.
What to ask Your Advisor
We strongly recommend you ask your advisor to disclose the amount of compensation paid to them on the sale of the Life Insurance policy. (You can ask a similar question regarding the sale of Disability and Critical Illness Insurance; however, commissions on those sales do tend to be consistent across all products.)
Other information to ask and consider when buying a policy includes the following:
- Determine the track record of the advisor with which you are working. What amount of in force insurance business (how much coverage in force) does the advisor have under administration? It should include the amount of Life Insurance, Disability Insurance, and Critical Illness Insurance in force. What is the claims payment record on their book of business? What is the persistency rate of their policies over the years? How much Whole Life insurance is included in the advisor’s in force policies?
- Determine compensation in terms of a client’s ongoing support team. The total amount of compensation paid to the advisor should be viewed in terms of the support and the team that you have at your disposal if you buy the policy from that advisor. If you buy a policy from an advisor who does not have any assistance of any kind or does not work within an advisory team, then you know that that compensation is significantly going to that advisor, whereas if you’re working with an advisor who has an advisory team behind them, then you know that the compensation needs to be allocated to the resources at your disposal. You want to have a client support team that will be available to you to answer questions and provide you with the comfort that you need that your policy is in line and operating as expected for the life of that policy.
- Determine the continuity plan for the insurance advisory service. It is important that the continuity plan support you long term since a Life Insurance policy is typically purchased for many years into the future. Insurance is long term…is your advisor going to be there when you need them?
- Determine whether your advisor supports environmental and social causes. What is your advisor (or their firm) doing to better the planet? For example, Cove supports many social and environmental causes, and we have a dedicated Impact Planning division. Where a client has set up a policy to provide for charities, Cove will contribute part of the commission to that charity in order to support its good work as part of our commitment to use business as a force for good.
Overall, you should expect the following from your insurance advisor:
- Highly qualified advisors
- Extensive capabilities and resources
- To be treated with respect
- Given all required information to make confident decisions
- Excellent ongoing service
- No pressure tactics
There’s no need for insurance commissions to be the elephant in the room. You have a right to this information and a qualified advisor should have no problem providing you with it.
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