There are several selfish reasons for advisers to sell cash value life insurance. One of the main reasons advisers should sell CVL is because of the renewal commissions.
The following are the typical commissions on cash value life sales
1) Up-front commissions typically range from 50 percent to 100 percent of the target premium.
2) Excess premium: Premium payments above the TP are treated as EP and usually range from 1 percent to 3 percent.
3) Renewal commissions: Most companies pay renewal commissions on premiums paid into the policy from years two through nine. RCs usually range from 1 percent to 3 percent.
Typical lifetime commission example:
Client, age 45, pays a $50,000 premium each year from ages 45–65. Assume the target premium is $19,500 and the
agent is on a 75 percent contract with renewals and excess commission at 2 percent.
Earning an asset-based trail fee for 20+ years
- Total compensation year 1 = $15,235 [(75 percent x $19.5k) + (2 percent x $30.5k) = $14,625 + $610]
- Renewal and excess commissions years 2–10 = $1,000 ($50k x .2 percent)
- Total compensation for years 1–10 = $24,235 (After year 10 there is no more comp.)
What is an asset-based trail fee
? It's a commission based on the cash account value (CAV, not the lower CSV). The asset-based fee an adviser can earn ranges from 0.1 percent to 0.12 percent. It starts in year six and is paid for as long as the policy is in force.
Let's look at the same example as above and assume the policy earned a rate of return in the 80th percentile of what it would have returned over the last 20 years.
- Total compensation year one = $15,235 [(75 percent x $19.5k) + (2 percent x $30.5k) = $14,625 + $610]
- Renewal and excess commissions years 2-10 = $1,000 ($50k x .2 percent)
- Asset-based fee years 6–41 (using 85 as the assumed age of death) = $105,450
- Total compensation for years 1–41 = $129,685
Which one do you like better? $24,235 or $129,685. Even asking the question seems silly.
If the client maximum borrowed from the policy starting at age 66, the total compensation would go down, of course (to $56,638). Again, which would you rather have? $24,235 or $56,638.
If you are not selling EIUL policies
with an asset based trail fee, you are missing out on an opportunity to create your own deferred income stream. If you want information on the policies that offer such a trail fee, please feel free to message me.