Editor's pick: Commissions no longer a tightly guarded secret

By Lauren McNitt


Insurance agents in New York are now required to tell their clients in writing how much they are being compensated, a rule known as Regulation 194. The Independent Insurance Agents and Brokers of New York fought the rule, but in March Regulation 194 survived appeals court. IIABNY said it will not appeal and will help agents comply with the rule, according to WSJ reporter Leslie Schism's article, "Insurance Fees, Revealed."

Schism says disclosing compensation is important to consumers because an insurer may be more generous in their product features if they aren’t spending a bundle on agent commissions:
    Agents' commissions can be steep, but they aren't readily apparent because they are paid by the insurer… For many popular types of annuities, commissions run from 5 percent to 7 percent of the invested amount, and some insurers pay 8 percent or more to agents. The disclosure could be a starting point for a conversation about whether a lower-commission version of the product, or a different product, might offer greater value, consumer advocates say.
Schism says experts are predicting other states will institute similar rules to Regulation 194. What effect do you think this type of regulation would have on you as an agent? Do you think this rule will help your clients when they are making decisions on what products to purchase?

On life and annuities:

Schism says commissions are more important when considering permanent life insurance than term life:
    The commission is more important with permanent life. To see the impact, look at the "illustration" provided by the agent of the projected cash-surrender value over time. In large part due to the commission, there may be little cash-surrender value in the first year.
Of indexed annuities, Schism cites a ProducersWEB contributor, Sheryl Moore:
    Commissions currently average 6.3 percent of the principal payment, says Sheryl Moore, founder of AnnuitySpecs, a market-research firm.
Schism is harder on variable annuities:
    Upfront commissions recently have run 4 percent to 7 percent or so of the invested amount, paid by the insurer. As with permanent-life insurance, they also carry annual fees. Fees in versions with generous guarantees of lifetime income can top 3.5% a year of the account balance, which is a serious drag on your funds' returns.
Do you think her cautions on permanent life and variable annuities are warranted?

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