The practice of rebating in the life insurance world means the broker gives you a kickback to incentivize you to purchase the policy from them instead of another broker. Think of it this way – you’re car shopping with one sales rep, and another rep comes along and says ‘hey buddy, buy the car from me, and when I get paid for the sale, I’ll slip you a cool $100’.
You can think of that as a cool $100 in your jeans. Or, you may decide that that’s not how you want to do business.
In life insurance, in almost all provinces, rebating is illegal – a broker that rebates or incentivizes a client to purchase life insurance is placing their insurance license at risk. However in British Columbia, rebating is legal. Worse (IMO), it’s possibly rampant. It’s a race to the bottom to see who can offer clients more of a kickback on their life insurance premiums.
I’ll let consumers decide for themselves if they want to deal with brokers who rebate life insurance premiums. However for brokers that are doing this, I offer some advice. You are putting yourself needlessly at risk.
Lets say you rebate $250 on a $1000/year premium. Next year another broker comes along and convinces your client to take a new medical, rewrite, and offers them another $250 rebate. The client, who already has demonstrated that they don’t care about your services and only the rebate is now faced with the following choice. Pay ‘your’ premium, or for a 30 minute medical exam take the new policy for $750. Guess what’s going to happen?
What’s going to happen is you’re going to be getting a chargeback. You’re going to be paying the company back your entire commission AND the client’s $250. The client’s got $250 in free money out of your pocket. (Aside, for consumers: If you purchase a life insurance policy, the broker earns a commission. If you cancel that policy in the first two years, the company claws back the commission. If they gave $250 of that commission to you, they still have to pay it back, even though you get to ‘keep’ it).
Which is why I view this race to the bottom in a negative fashion. It’s a bad business decision to start paying people who can then force you to pay them AND pay the company back as well. It’s a bad business decision, I guess it’s a good decision if you’re focusing on today’s commission instead of the longevity of your business.
Here’s what I would do – if you are going to give someone a rebate of premiums, you should get an agreement from them that if they cause a commission clawback in the first two years of the policy, that they then owe you back the rebate. Client cancels the policy, they have to give you back the $250 you paid them. That wipes out the incentive I mentioned above.
To that end, I’ve had a lawyer draft a rebate agreement for use between an agent and a client. The full text follows, use it at your peril/pleasure, whatever – you’re getting a free legal agreement off the internet so use it at your own risk. (To be clear though, I did have a Canadian insurance lawyer draft this agreement). If you are rebating, I urge you to use it with your clients in order to prevent churning and chargebacks.
The full text follows. Please note, I paid for this agreement, and I’m giving it to you for free. If you decide it’s worth your using it, your payment is in the form of giving me a link from your website to this one.
Life Insurance Policy Rebate Agreement
THIS life Insurance Policy Rebate Agreement is dated and made effective as of the ____ day of ____________, 2014
[name of Policy owner],
resident of [civic address of Policy owner] (the “Policy-owner”).
A. The Agent is an insurance agent who is duly licensed to advise and sell life insurance policies in the province of the Policy-owner’s residence.
B. The Policy-owner has purchased, or intends to purchase, a policy of life insurance from the Agent and in, particular, as follows:
Type life insurance policy coverage:
(e.g., whole life policy)
Name of Insured:
Date Policy effective:
C. In relation to the purchase of the Policy by the Policy-owner from the Agent, the Agent received a commission from the Insurer for placing the Policy with the Policy-owner (the “Commission”).
D. In relation to the purchase of the Policy by the Policy-owner from the Agent, promptly after the Agent receives the Commission, the Agent has or will transfer and remit a payment of funds to the Policy-owner in the amount of $ _________ (the “Rebate”) as a notional portion of the Policy premium and, for greater certainty, the Rebate is not intended to compensate anyone for the transaction of insurance.
E. If there are any material changes to the Policy over the course of the first 24 months of the Policy coverage, the Agent may be obligated to return all or part of the Commission to the Insurer (the “Chargeback”) and in such event, the parties intend that the Policy-holder will refund the Rebate to the Agent.
THEREFORE, in consideration of the mutual promises and premises set out in this Agreement, the parties have agreed as follows:
1.0 Solemn Declarations of the Policy-owner
In respect to this Agreement, the Policy-owner hereby declares to fully understand the legal effect of this Agreement and voluntarily intends to be bound accordingly. The Policy-owner hereby waives and disclaims any assertion that the Agent owes a fiduciary obligation to Policy-Owner in relation to the matters contemplated by this Agreement. The Policy-owner hereby acknowledges that, equitably, the Agent should not suffer detriment as a result of any act or omission of the Policy-owner and the Policy-owner should not be permitted to be enriched by retaining and refusing to properly refund the Rebate to the Agent if a Chargeback Event (as defined herein) occurs.
2.0 Policy-owner change to Policy
2.1 During the 24 months immediately after the Policy-owner’s purchase of the Policy and its effective Date, if the Policy-owner directly or indirectly causes a change to the Policy and its coverage, whether by an act or omission, whether the change is intentional or inadvertent and unintentional, including cancellation of the Policy, a change to the face amount of coverage under the Policy, or any other change such that, as a consequence, the Agent must return any part of the Commission earned in connection to the Policy or otherwise reimburse or compensate the Insurer (the “Chargeback Event”), the Policy-owner hereby unconditionally agrees to diligently complete the following steps in good faith:
(a) immediately advise the Agent in writing that a Chargeback event has occurred; and
(b) promptly transfer and remit a payment in the amount equal the Rebate to the Agent (the “Refund”) and no event any later than 30 calendar days after the Chargeback Event.
2.2 In the event that the Policy-owner fails to remit the Refund to the Agent, interest will accrue on the Refund in favour of the Agent at a rate of 26% per annum and become due and owing from the Policy-owner to the Agent commencing 30 days following the Chargeback Event.
In relation to the Rebate and Refund, the Policy-owner and Agent will exclusively and solely each bear their own respective tax liabilities including the Goods and Services Tax (GST), provincial taxes and fees if applicable, and income tax as may be applicable. Each party hereby covenants to duly comply with all required tax filings and remittances and to absolutely indemnify and save harmless the counter-party (other party) in the event that a party fails to duly complete required tax filings and remittances.
The duration of this Agreement is a period commencing on the effective date of the Policy and expiring2 years and 30 calendar days later unless a Chargeback Event has occurred, in which case the Agreement terminates upon full payment of the Rebate to the Agent.
In this paragraph, “Confidential Information” includes, but is not limited to, all non-public information relating to Agent and Policy-owner’s relationship and this Agreement. During the course of this Agreement, the Policy-owner will learn of Confidential Information that is proprietary to the Agent. The Policy-owner agrees to act in good faith and to ensure that any Confidential Information acquired is safeguarded and not disclosed to third-parties except as may be required by operation of law or to give effect to the provisions and parties’ mutual intent of this Agreement.
6.1 Policy-owner and Agent are not partners or agents
Following completion of the Policy purchase transition, the parties mutually intend that the Policy-owner and Agent are not partners and no agency or partnership exists whatsoever.
Any notices provided to the other party under this agreement will be will be in writing and addressed to the party at its facsimile number or civic address listed below or to such other address as a party may, from time to time by written notice, may advise and direct the other party to use:
To Agent: Attention: [name, address] Facsimile: (XXX) _________________
To Policy-owner: Attention: [name, address] Facsimile: (XXX) _________________
With prior mutual consent, notices may be delivered by email and the counter-party (recipient) must confirm receipt of a notice by email for it to have been effectively delivered; and the parties will, in good faith, confirm actual receipt of notices by email when received.
6.3 No Assignment
The obligations under this agreement are personal in nature and, therefore, cannot be assigned to a third party. Neither party may assign its rights under this agreement or cause its obligations to be assumed by any third-party without the prior express, written consent of the other party to this agreement. This Agreement binds and is for the benefit of the parties and their successors and their respective permitted assigns.
6.4 No Waiver of Terms
The waiver by any party of the strict performance of any of the terms of this agreement will not constitute a future waiver of such terms nor will it prevent that party from enforcing such terms in the future or its own performance on a timely basis in any other instance.
6.5 Entire agreement
This Agreement sets forth the entire agreement between the parties and supersedes all previous discussions, representations, and agreements between the parties, whether written or oral, and may be amended only through the express written consent of the parties.
6.6 Governing Law
This Agreement will be governed by the laws of the Province of the Policy-owner’s residence.
In the event that any provision in this Agreement is determined by a court to be unenforceable for any reason, such provision will be deleted in such manner as to make the modified agreement legal and enforceable under the applicable laws, and the balance of the agreement the balance being construed as severable and independent and commercially reasonable.
6.8 Entire agreement
This agreement sets forth the entire agreement between the parties and supersedes all previous discussions, representations, and agreements between the parties, whether written or oral, and may be amended only through the express written consent of the parties.
6.9 Force Majeure
Except for the obligation to make payments, non-performance by either party shall be excused to the extent that performance is rendered impossible by strike, fire, flood, governmental acts or orders or restrictions, or documented failure of suppliers (including telecommunications vendors or suppliers), or any other reason where failure to perform is beyond the control and not caused by the negligence of the non-performing party.
6.10 Non-exclusivity of Policy-owner’s Services
The Policy-owner hereby consents and acknowledges that the Agent’s services are non-exclusive and not restricted to only the Policy-owner during the Term.
AS EVIDENCE OF THEIR AGREEMENT the parties have executed this Agreement effective as of the date and year first above written.
SIGNED, SEALED, AND DELIVERED by [name of Policy-owner] in the presence of:
Name of witness
I declare that I fully understand and voluntarily accept the terms of this Agreement:
[name of Policy-owner] (Policy-owner)