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How Life Insurance Brokers Are Paid And Why You Don’t Care

How Do Life Insurance Brokers Get Paid?

I continue to read online articles that claim life insurance brokers sell certain products because their commission is higher on certain products. These articles then always follow up with suggesting consumers need to delve into the fine details of how brokers are paid. Doing so apparently protects your best interests.

I disagree entirely. If I tell you exactly how I’m paid, it’ll make exactly 0 difference to the products I recommend or the premiums you pay. There’s a certain morbid curiosity in knowing someone else’s income and I believe that’s why this myth gets propagated. Not because it impacts sales or your premium, but because people are fascinated with the idea of a commission.

However, I do believe that some advisors are more prone to selling some types of life insurance or some companies more than others. Below I’m going to explain first of all EXACTLY how advisors get paid. Then I will explain how brokers *actually* get motivated to sell a product or company. And finally, I will show you how to avoid those potential pitfalls – and it’s not going to be by having a conversation about commissions.

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Overview of Commissions

Life insurance commissions have two tiers – the base commission, and the ‘override’. Base commission is fixed per product, per company and is effectively a percentage of 1st year’s annual premium. Override is a percentage of base commission and varies by how much volume an advisor does. Overrides typically range between 100% to 180%.

Here are some real life examples which are based on a $1000/year premium. Note that the commission is effectively a total, one time for the life of the policy. These commissions are not paid every year.

Note that the BMO commission is a special commission rate that is current as of the time of writing.

 Manulife 120% overrideManulife 180% overrideBMO 180% overrideSmaller player 210% override
Whole Life$1100$1400  
Universal Life$1320$1680  
20 year term$1100$1400$1680$1280

Do you see a clear motivation to sell whole life or universal life over term insurance? I don’t. The motivation to sell on commission, if it exists (and that’s debatable) is more likely company selection and volume to get higher overrides. It’s clear from that table that if one can make a living selling whole life, then one can just as easily make a living selling term insurance. It’s NOT the commission driving the concern over product types.

Also of note, an advisor can’t normally change their commission to benefit your premiums (this is available on very large insurance policies which have premiums in excess of $25,000 anually, but certainly not on life insurance policies for the rest of us). So, we can’t monkey with your premiums by cutting our commissions

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Why Do Brokers Sell Some Products Instead of Others?

The problem is in the number of companies that an advisor deals with.

Let me start by explaining that the term ‘product sales’ is used when an advisor starts with a product and fits the client to it rather than starting with the client and fitting the product. That is the real basis for concern, and as we have just seen, I don’t believe it is based on commission. So, what causes this?

Life insurance companies do have specific preferences when it comes to products. They extol the virtues of specific types of coverage to brokers and provide training and information that show the benefits of some types of policies.

Over time, many advisors become comfortable dealing with a small number of companies. They’re familiar with the products, have strong contacts when they need assistance, and get better service and treatment from the company. That leaves the advisor exposed to the full onslaught of marketing products as directed by the company. Advisors read all the benefits of these specific product types as promoted by the company. The benefits are real and the companies are trusted. As a result, they offer and explain these benefits of these specific products to their clients. And some of them buy based on that – and that’s positive reinforcement.

Over time, advisors then become acclimatized to showing consumers the benefits of these specific products from these specific companies, and now you have the potential for product sales. And that’s bad.

How Do I Protect Myself From Product Sales?

Product sales aren’t likely the result of commissions as we have seen – forget what your life insurance advisor makes. Instead, start addressing how many companies an advisor routinely does business with.

Further, address how many companies they ACTUALLY do business with – not just have access to. Many advisors only do business with one company – you’re open to product sales. Many other advisors do business with only 2-3 companies. Again, you’re open to product sales. These advisors may have access to 15 companies, but again, only actually sell for 2 or 3 unless specifically asked.

And then way down the list are a few advisors who routinely do business with much more than 2-3 companies. Those brokers are more likely to be independent in my opinion, and thus less likely to engage in product sales.

Summary

So forget commission. Forget asking if they’re a broker or how many companies they have access to. Ask instead how many companies they have done business with in the last year. That is the best way to make sure you’re getting the right product. Deal with a broker who will work with any company, and hasn’t become tied to a limited few.

Frequently Asked Questions

What is the difference between an insurance broker, an advisor, and an agent?

Broadly speaking, insurance brokers and insurance advisors are similar. Both positions require working on behalf of clients to conduct financial needs analyses, establish a client’s risk, and offer tailored financial advice. Neither sell insurance policies directly, but act as the middle man between you and an insurance provider. you do not need to purchase one to work with an insurance broker or advisor. A client may simply wish to receive an expert opinion on their financial situation, especially when approaching an important milestone (eg. purchasing property or retiring).

However, an insurance agent works on behalf of an insurance company rather than a client. “Captive” agents are essentially salespeople. Insurance agents are not trained to give financial advice for any concerns not directly related to their range of insurance products. So, if you’re looking for unbiased and wide-ranging advice, best to hire an advisor or broker to help.

 Do estimated quotes count your broker’s commission?

Yes. If you’re using an online insurance calculator to estimate the cost of your insurance policy, the odds are it will reflect your broker or agent’s commission. Commissions are calculated as a percentage of your premiums, which varies depending on your provider.

Most efficient online calculation services, such as Life Insurance Canada, work with insurance providers to guarantee up-to-date pricing. As a result, the quotes will reflect the nuances from one provider to another. If you’re shopping around for a policy, it can be helpful to source quotes from a few different calculation services for maximum accuracy.

 Is there a way to avoid paying a commission on your insurance policy?

No. Some people believe that trying to find a way around paying commissions will lower the overall cost of their premiums. A popular myth is that purchasing a policy directly from an insurance provider will save you the cost of a broker’s commission. This simply isn’t true and, in fact, this kind of purchase may turn out to be the most expensive way to get insurance.

The best way to save money on your insurance policy is not by skipping the step of working with an advisor, but rather informing your advisor about your budget and circumstance. A well-respected insurance broker will have your best interest at heart more than any company.

 Can I ask my agent or broker what their commission is?

Yes. When you’re purchasing an insurance policy, you are trusting an individual to help manage your finances. It’s normal that you should be cautious about hidden fees and the exact breakdown of the costs you are incurring. Of course, there are respectful ways to inquire about your broker’s commission and it’s important to be respectful of their services. If you have a good relationship with your broker or advisor, it should be a relatively straight-forward question. If you are a newer client, you might want to frame your question as a generalization rather than a personal inquiry (eg. “Some online resources have highlighted the importance of understanding commission fees, can you tell me more about how they work?”).

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