In my last post, I covered some of the mutual fund expenses you may have missed. Now, let’s cover life insurance – I know, it’s no fun to talk about life insurance, but sometimes our responsibilities are not fun. I’ll be brief.
This isn’t a discussion about the merits of term life insurance versus the various forms of permanent life insurance – that’s a whole other discussion I’ll cover in the future. For now, let’s narrow in on the common costs of each.
Life insurance is a wonderful product and is one of the most versatile products I have at my disposal to help clients. I’m betting you knew that part of the cost of that coverage provides you with the death benefit if you died, and that there are some administrative fees baked in there too. What else is included in your premium that you may not have known about?
Commissions
Oh, I know, the demonized “C” word. Insurance is sold by agents, and almost every policy pays that agent for selling you the policy. There is nothing wrong with a commission in exchange for assistance. How much is it? This varies by many factors including the type of product, the company, and sometimes the age of the insured.
From my experience, a mental rule of thumb for me is that most term policies pay 50%-75% of the annual premium to the agent in year 1, and a small amount (2%-5%) each year for several years after that. Permanent policies often pay a lower percentage, but since the premiums are higher the commissions are too.
If you think you saved money by buying a policy on-line, guess again. The price is the price. The only difference is that the company/agent that runs the website got the commission without having to help you at all.
Surrender Charges
These only come into play if we are talking about a permanent (whole, variable, universal) life policy, and if you drop it in the first 7-15 years of the policy. It’s usually a declining percentage of the cash value of the policy (e.g. 8% in year 1, 7% in year 2-3, etc.). Permanent life policies are rarely useful if you buy and then discontinue them; they can be excellent if designed for the long-term horizon. Thus, if you bump into these then you may not have made the right plan to use it in the first place.
Premium loads
There are even agents that don’t understand or think about these charges. Essentially, these pay for commissions and taxes the insurance company owes and come out off the top. So if your monthly premium is $100, then a policy with a 5% premium load would be putting $95 into the policy itself. Again, this is mostly applicable for permanent life policies.
Takeaways
- Commissions are not inherently bad. You just want to make sure that the amount is fair considering the time and expertise the agent provided you for that commission.
- Higher costs are not always bad. It depends on what you need. The production costs of a Mercedes are different than a Honda, but both can be the right car for you.
- The right policy for you will be more valuable to you than any premium or fees. As I heard in my time of selling life insurance, “the premium is not the problem, the premium is the solution to a problem”.
Is there something about these policies that you’ve never understand or want to know more about? Leave a comment below or connect with me privately!
