As I’m sure you’ve gathered, buying insurance is not the most transparent process. The entire insurance industry is set up on an agency system. It’s designed so that someone MUST be paid a commission – hidden insurance fees you never see!
This is why fee-only financial planners like me can’t transact in insurance (we don’t get commissions ever.)
An agency system is a framework where an agent is responsible for a geographic territory and insurance is transacted through that agent, not the home office.
Think about that for a second. If you had car insurance through State Farm, you don’t call the main corporate headquarters when you have a question about your insurance. There isn’t anyone there to answer your call, or if they do, they will dispatch you to the closest agent in proximity to you so they can handle the “customer service” side.
Not only is the agency system pretty antiquated, but most insurance companies are also built on super archaic systems that run on DOS. Yes, DOS. I’m not just talking about small companies either. Large ones such as State Farm use it.
Unfortunately, because agents can’t just turn off the commission being paid, the buyer of insurance will continue to have to pay inflated premiums for all of their insurance needs.
It’s important to make this connection: If insurance agents didn’t get commissions, this would automatically lower the premium the client pays for the same amount of insurance.
How Do You Get the Best Price on Insurance?
You’ll get different insurance quotes because various insurance companies offer different commissions to their agents. This is another reason why it’s important to get multiple quotes if you are shopping for insurance on your own.
While you’re getting quotes, don’t be afraid to ask what the agent gets paid out of that. Fee-only financial planners can give advice on insurance but they can’t transact in insurance.
While we wish there was a change in the insurance industry, fee-only advisors simply aren’t big enough to push for these changes.
All you can do is make sure you watch out for yourself and do your due diligence before signing anything.
What Type of Commission Do Agents Get?
The commission agents get varies, but here is a basic breakdown of it:
- Disability Insurance Commission: For disability insurance, agents can get 40-50% of the first year’s premium as a commission and a 2-8% trail on the premium. Basically, as long as you keep the policy active, they continue to earn a commission. It’s not a bad passive income strategy for the agents, but it is a broken system for the insured overall.
- Term Insurance Commission: For term insurance, agents typically get a 50-90% commission on your first-year premium. For this, there is usually no trail, but sometimes there might be.
- Whole & Variable Insurance Commission: For whole life and variable life insurance, an agent’s commission ranges from 30-60% the first year and a 2-10% trail on either cash value or premium paid.
Why You Keep Getting Calls From Insurance Agents
Picture This: You bought term insurance from an agent and everything has been going fine for a few years. Randomly, the agent calls you and says they were looking over your insurance needs and think it’s time to have a meeting to see if you should increase coverage or convert some of your term insurance policy to a permanent insurance policy, like whole life or variable life insurance.
Have you ever wondered why you received the call or does this sound familiar?
Well, the reason they pitch you to convert your term life insurance to permanent life insurance is that your term insurance paid your agent in the first year, upfront, and then nothing for the life of the policy.
So, nothing is in it for the agent if all their clients have term insurance because they rarely receive a trail on those policies.
If they convince their clients to convert to a permanent policy, though, they will not only earn another commission on the first year’s premium, but they will also earn the trail for as long as the policy is active.
The structure of how agents get paid incentivizes them to reach out to their book of business every few years with the pitch of converting to permanent insurance so they can get paid again. It’s disgusting, honestly.
Other than asking the agent and hoping they tell you the truth, the only way you can verify what the agent is getting paid is to see the contract that the agent has with the home office (insurance company.) And, most agents will not let you see that.
It’s so frustrating and archaic, but until one of the big insurance companies steps up and changes this for the benefit of the consumer, this is the hand we all have been dealt.
Words of Wisdom on Avoiding Hidden Insurance Fees
Take Note of the Class the Quote is For
Be careful in getting quotes for a specific class (preferred plus or ultra preferred best) and seeing low rates and comparing them to another quote in a different class (preferred).
This is super common to see when clients bring in quotes that they obtained before we started working together. They will quote preferred plus 15-year term and then preferred for a 20-year term as well as preferred for a 25-year term (or some variation of that).
By mixing the two, they will show you teaser rates to “beat competitors” as they know you are shopping them around, hoping that you might not notice that they switched classes.
Maybe I’m being pessimistic, but I highly doubt they are doing this by accident. I’ve seen this enough to know that they can’t be making the same mistakes.
Avoid Undweriting Fatigue
All the insurance agent really wants is to get you into underwriting knowing that you will come out with a higher quote and will sell the policy to you on the backend.
This is the concept that they will pitch why you need it, might say this was the only company to give an offer, etc., and then sell it to you. They are banking that you will have underwriter fatigue and just accept.
Their goal is to get you to choose them to go ahead with the underwriting, not the other agent down the street. If they can get you to go into underwriting they know that they will be able to be in a stronger position to sell you the policy as time has passed.
After all, you went through the medical exam/blood work and are very far along in the process. They know that you will not want to go through the application process with another agent and that you will be going through underwriting fatigue.
Make Sure You are Comparison Shopping the Same Terms
Also, make sure you compare apples to apples, that you are comparing the same class rates (preferred vs preferred), and that the company you are choosing has a COMDEX rating over 90.
Make Sure To Avoid Paying Hidden Insurance Fees
Lastly, understand that each time you want to go and get a formal quote and go through underwriting, each agent will have their own set of forms/applications that you will need to fill out.
There is no universal application that is accepted by insurance companies. They each have their own and want to see the information presented in a specific way.
Make sure that you are confident that you select the right agent/broker to work with so you don’t experience underwriting fatigue. That way you won’t get a policy you don’t need or end up not getting a policy that you really do need because you are “too far into the process.”
If you have any questions about insurance, especially the best types of insurance for doctors and how much coverage you need as a physician, I’m happy to help.
