I’m an Insurance Agent. Here’s How Much I Could Make From Your Policy

Today we'll answer the question, do agent commissions affect my cash value at all? The answer is yes and no. For example, if you were to get a whole life insurance policy and you worked with two different agents and those two agents showed you a policy with the same insurance company, the same insurance product, and they were both set up the exact same way, the policy would be identical to you and the agent would receive the same commission rate from the insurance company meaning they're both paid the same. It'd be like shopping for a car, you go to 10 different dealers but the car you look at is identical. The same model, year, specs, features, color, everything's the same and the price is the same across the board or at least it should be with all the different dealers. So it'd be the same thing with whole life insurance. But on the flip side what has an impact on the commission is the company selection, the product selection, and then also the way that the policy is designed or set up. So today we'll hit on all three. What we'll cover is as follows. We'll look at the company choice, product choice, and then also the product design. As these are critical in driving your cash value growth and also agent commission. So let's start with the company choice. When choosing a life insurance company first, we have what I like to call the 4 major mutual life insurance companies or that big 4. These companies are Mass Mutual, Guardian, New York Life, and Northwestern Mutual. They're considered the 4 major mutuals because 1, they're mutual companies 2, they're the majors because they are massive in terms of size they've all been around for more than 160 years but the biggest selling point in my opinion is they can provide proof of performance. Meaning they don't just show good-looking illustrations when I look at real whole life insurance policies that have lived the test of time I see strong results with those companies. Also, those companies tend to pay the lowest commissions on whole life insurance products in the industry. That's been the case as I've compared them in almost every company out there. So you've got your 4 major mutuals and then we've got other life insurance companies. So the 1st thing that I want to say about other companies is they're not bad companies compared to the 4 major mutuals. There are times we have used other companies in the past when those have been more appropriate for the individual we are working with. But I do like the major mutuals mainly because of proof of performance. Meaning, if I'm getting a policy for cash value I want proof that that company has delivered. I see that with the major mutuals when I look at other companies the proof is often limited or non-existent. The other thing that I see with most other life insurance companies is that the commissions are much higher. So from the consumer's perspective you getting a policy we've seen proof of performance with the 4 major mutuals and with other companies we have seen very limited proof or in some cases no proof at all. And from a commission perspective commissions are lower with those 4 major mutual companies. So the company choice will have an impact both on the cash value growth and the agent commission. The second thing, products. So, there are a lot of different types of whole life insurance products. The most commonly type of sold whole life insurance product is a traditional whole life insurance policy. This will often be called a whole life $100 or paid up at $121 and then you have high cash value products. These are often limited pay products like a 10 pay policy and sometimes you'll see it in the name of the product itself high early cash value or something similar to that. The thing is, some products are designed to prioritize life insurance 1st and cash value 2nd by the insurance company where other products are designed to prioritize cash accumulation 1st and life insurance 2nd. So think of it it's not the agent designing the policy this is how the insurance company designs the product from the very get-go. Meaning, you can go buy a Ford but you can either buy a pickup truck which serves a specific purpose or you can buy a Mustang, my 1st car. So, starting with traditional products. So if we look at a traditional product with another company here's how it would work. So, assuming that you have a base premium I'll explain exactly what that means in a little bit but a base premium of $10,000 the commission rate could be as high as 134% in the 1st year. So what that means is if you pay a base premium of $10,000 I the agent can receive a commission as high as $13,400 in the 1st year alone. And the cash value performance will not be attractive based on what I know other products will deliver. Now, what if I look at a traditional product with a major mutual company? So if I take MassMutual for example and their traditional whole life insurance product and I look at the same base premium of $10,000 the commission rate might be as high as 95% in the 1st year. Which means if you pay that same $10,000 base premium the agent, me, is due to receive $9,500. Now, what I have observed is when I look at the cash value performance with traditional whole life insurance policies with the major mutuals like a MassMutual versus others and traditional products with the others I have seen stronger cash value performance with the major mutuals. That's why I've got $2 signed with this one and only 1 with the 1 to the left. But still that's a very high commission, isn't it? Check this out. So, what if we look at a product with MassMutual again but a product set up for high cash value? They're 10 PayPal's and you have the same $10,000 base premium now all of a sudden instead of a 95% commission rate the commission rate is 30%. That means the agent, me, is due to receive only $3,000 but the cash value for you is significantly higher. I'll show you an example in a little bit. But first, let's hit on our last point which is product design. So this is definitely the more complicated part of the 3 but it's also the most important in my opinion. So, with a whole life insurance policy you can choose where your money goes. There are 2 main areas the base premium and then what is called your PUA rider. PUA stands for paid up additions. Dollars that go toward the base premium prioritize the life insurance first and cash value second. Whereas dollars that go toward your PUA rider prioritize cash value first and life insurance second. A quick side note about dollars that go toward that PUA rider the commission rate is usually between 2% and 3%. I've got 2% here because we're about to look at an example with MassMutual and the commission rate on their PUA rider is 2%. So, the question that I would ask if I am you and I'm interested in a whole life insurance policy and cash value is my goal is how low can the base premium be based on my total deposit? And the answer to that question is it depends on the insurance company. Most of the major mutuals let us have very close to a 10% minimum base premium. Here's what that means. So if this is you and you're looking to put in $10,000 per year 10% of that can be directed toward the base premium and then 90% can be directed toward the PUA rider. You will need a term insurance rider to prevent what is called a modified endowment contract from occurring or a MEC that's a taxable event and the same is true if you want to put $100,000 toward the policy. It's all ratios where it can drive that base premium typically as low as 10%. That's not a hard number all insurance companies have different rules some allow a bigger lump some PUA deposit in the 1st year I would check out some of our videos that go through PUA limits with different insurance companies if you'd like to understand how that works. But the thing is when you look at money going into a whole life insurance policy if you drive that base premium down what you are going to see every single time especially when you look at the upfront cash value and the guaranteed cash value is you're going to see more cash value but less commission to the agent. And how I explain that is that's just how it works. If someone's interested in cash value the insurance company is going to credit the policyholder more cash value and then as a result that money is there for the policyholder so they're going to pay out less in commission. Let's take a look at an example. So we'll look at a mass mutual policy that's traditional and then we'll look at a mass mutual policy that's high cash value. So here we've got $100,000 per year going into the policy and you can take a 0 off add a 0 it's all relative. So this is their whole life 100 product which again is a traditional whole life insurance policy. They pay $100,000 in in the 1st year their cash value is nothing, 0. By the 10th year they've paid a total of $1,000,000 $100,000 per year for 10 years and their cash value is $830,000. They're still running a loss. Now if we look at their high cash value policy one of their high cash value policies a 10-Bay product we did 2 things here. 1, we looked at a product that's designed for high cash value 2, we designed it in a way that's beefed up for cash value. So the minimum base premium here is $6,700. You've got $100,000 going in when we look at the 1st year cash value look at that $92,000. And by the 10th year you've paid the same $1,000,000 in but your cash value is $1.25 million. Same out-of-pocket to you same insurance company but 2 different products and both designed in different ways that's the difference. Now if we compare these 2 what's the difference in compensation or commission? Let's take a look. So what we've got here is 1st, the traditional policy that we just looked at. In this example he wanted to fund $100,000 per year for 10 years so he did that nothing thereafter and by the 20th year his cash value has produced a little bit of a gain $1.36 million and if we look at the internal rate of return it's just over 2%. Not that attractive at all. Now if we look at the high cash value policy what's the difference? A couple things here. 1st, what's the same? He paid $100,000 per year for 10 years. Okay, got that, cool. Now of that $100,000 we see the premium the base premium was at $6,700 but he also had a term insurance rider there are 2 of them actually which is why I've got it at $10,000 here. But when we look at the breakdown as to where the money is going in this example we've got the premium minimized the PUA rider maximized but the total out-of-pocket is the same $100,000. And instead of a 100% loss in the 1st year it's about an 8% loss. Okay, got it. Now if we look at year 20 cash value is almost $2,200,000 the internal rate of return is about 5.1%. Same exact insurance company. Here's the difference though what do you think I make? If you go with the traditional life insurance policy which is the most common type of whole life insurance policy that is sold by agents meaning when people have a conversation with someone advising that they put money into a whole life insurance policy the traditional one is what is shown the most. The 1st year cash value I've got $93,500 here. Earlier on the whiteboard I had wrote out 95% for the traditional whole life insurance product. Here we've got $93,500 because that's based on my actual rate. We could be at $95,000 but we kept it at $93,500 just to give a little bit of juice back to the people that help us at MassMutual. But with that said that's a lot. There are also renewal commissions that are paid for 10 years and if I look at the total compensation I would make over 10 years here you go almost $140,000 that I, your agent have earned on this policy. What if you compare that to the other one? The 1st year I make about $5,200. I make renewals but they're less than half of what I would make in the 1st example. So when I look at the total commission it's just over $25,000 over a 10-year period. So the difference when I look at company choice product choice and also how that product is designed does have a drastic impact on the cash value and the commission. So I definitely want to be aware of that as a policyholder. Here's the big thing to be aware of. As an agent I'm incentivized to sell you a policy with low cash value. It's just how it works when you look at the math. Sometimes I hear something like this well you want to go with a policy that has a higher base premium because the base premium drives dividends on a whole life insurance policy and that can result in greater long-term cash value if dividend rates go up. Yeah personally I think that that's nonsense one, because I see a lot of policies under deliver compared to what was shown on the illustration particularly those that have higher base premiums but also why I think it's nonsense is because a higher base premium drives the higher commission. Like of course someone's going to say that but the issue that I have with it is if there's no proof to support it and a non-guaranteed illustration is not proof that higher commission is paid at the consumer's expense. So anyway, do agent commissions impact my cash value growth as a policyholder? The answer is yes and no. When you go back to that good policy we looked at if you spoke to 10 different agents and all of them designed that policy in the exact same way that policy would look the same across the board and that commission rate is what it is. That's what's paid to the agent. But if you spoke to 10 different agents and they all showed you different companies, different products, different ways to design it that's going to cause some confusion where you'll look at the numbers and say wait a minute this company or this product looks a lot better than this one. Now if you really want to get to the bottom of things you could ask hey, what does the commission look like? And if you're nervous to ask that question I would just say hey, I really like full disclosure can you show exactly what your total commission is each year? Or I'd say can you show exactly what the total commission is each year? Make sure you phrase it like that because sometimes I've seen someone ask hey, can you let me know what your commission is? And if someone's splitting their commission with another agency or partner they'll show just the percentage or just the amount they received. It's like well, that's what you asked for it's like no, no, no. I want to know the total amount that way I have transparency around what companies and products are paying more and if lowering that compensation by designing the policy in a better way can result in me having cash value. Anyway, I hope you enjoyed this video I would love to hear any thoughts, comments, questions. Please feel free to leave them in the comments below and as always I hope this helps.