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How life insurance brokers are paid – and why you don’t care.

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

How do life insurance brokers get paid?
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 premium. Override is a percentage of base commission and varies by how much volume an advisor does. Overrides would range from 120% to 180%.

Here’s some real life examples, 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.

  Manulife 120% override Manulife 180% override BMO 180% override Smaller player 210% override
Whole Life $1100 $1400    
Universal Life $1320 $1680    
20 year term $1100 $1400 $1680 $1280

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

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 large insurance policies, but certainly not on life insurance policies for the rest of us). So we can’t monkey with your premiums by cutting our commissions.

So 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’s the real basis for concern, and as we’ve just seen, I don’t believe it’s 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. So 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 acclimatised 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’ve 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.

So forget commission. Forget asking if they’re a broker or how many companies they have access to. Ask instead how many companies they’ve done business with in the last year. That’s 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.

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