What if Life Insurance wasn't sold on commission?

This really is a pet peeve of mine.  They talk of forced savings, level premiums for life and the tax benefits of the cash build up.  We can argue that the cost of the insurance and the underlying expenses of these policies are not worth it.  But there are some people who are ardent believers in whole life.  Not surprisingly most of them are life insurance sales people or their thoroughly convinced customers.

Just how much more does a life insurance salesperson make when they sell you a whole life policy instead of a term policy?  Well, in one of my first posts, I compared the prices of a 30 year level premium term versus a whole life policy for a face value of $250,000 based on my age, gender and health profile.  The term would cost $462.50 per year, while the whole life would cost $2,988 per year.  So, how much of that goes to the salesperson?

According to Insure.com, the salesperson is paid approximately 50% of the first year's premium for a whole life policy and 40% of the first year's premium for selling a term policy.  Not such a big difference.  But when we consider the difference in the premium amount, the commissions paid to the salesperson become substantial.

For the policies listed above a State Farm rep would be paid $1494 for selling me the whole life policy, and only $185 for the term.  That's a lot of money.  Guess which one your insurance salesperson is going to recommend.

Of course they will back up that recommendation with all sorts of features that sound terrific.  Level premiums for life, tax benefits, insurance for life, cash build up...  They will disparage term as "renting" insurance.  Why rent when you can own?  Yea.  And, why sell term when you make almost ten times as much for selling whole life?

There are some instances where whole life is more beneficial.  I'm not going to get into that here, but I believe they are fairly infrequent.

Here is my proposal to take the clear conflict of interest out of this process.  The insurance salespeople should get paid based on the amount of insurance sold, not the type of insurance.  Or even better, as that would encourage them to recommend excessive amounts of insurance, they should just get paid a flat fee for reviewing and recommending proper types and amounts of insurance.

Comments

[Cal Ripken]

Insurance agents who are ethically sound, like myself, would never recommend one over the other without knowing what these people really need. 30 year term would be great for a lot of people. But if you live past your thirty years, you are screwed. Then what, oh I will take out another term policy, as I am almost dead. Oh wait, what is that insurance company? You say that my premium will probably be MORE than the insurance is worth? Why? Because I am statistically almost dead on the mortality table? Well that sucks, now how am I going to protect myself...If I only had gotten whole life. I could be retired right now and drawing off the cash value of my policy to supplement my income. I would be happy that my agent set me up with an investment with GUARANTEED interest rates, GUARANTEED protection for life, so long as I pay my premiums, or my cash values are sufficient enough to cover my premium (Assuming you have the proper rider) Also I would be happy to know that my family can afford to put me 6 feet under instead of putting me in a boat, dousing me in gasoline, and shooting flaming arrows at me as I drift to sea.

[Coach Bags]

Face up to the life with smile , no matter what will happened.