Conflict of Interest - Commissions

Life Insurance companies (in Canada) create a huge conflict of interest for their agents. Life Insurance comes in different flavors, Term, Whole Life, Universal Life. Each policy has its pros and cons and price point. Insurance companies pay agent with commissions, and commission rates are different between policies. This causes agents to try and sell inappropriate and too expensive policies to their clients.

Term insurance is what most people need. If you are a family and have a mortgage, you will want cheap term insurance, usually a term 10 or term 20. This will pay off you mortgage and provide income to your family after you die.

Let’s say you have a mortgage for $200,000 you want paid off and want to provide $30,000 of income to your spouse for 10 years. You therefore need about $500,000 of insurance.

Commissions are based off of the first years premiums of the policy you buy. Some agents also get paid a bonus but I won’t get into that here.

• Term 10 pays 40% of the first years premium as commission
• Term 20 pays 50% of the first years premium as commission
• Whole Life and Universal Life usually pay about 70%.

As you might guess the higher commission a policy pays the more expensive it is. Say you are a 40 year old male, non-smoker and want $500,000 of insurance. A term 10 policy should cost $405/y paying 40% commission the agent will make $162

Now the greedy agent will try and sell you a Whole Life or Universal Life which pays 70% but also costs about $5000 per year. Which stands to make them $3500 in commission.  The agent stands to make 20 times the commission if they sell you the more expensive policy. So they push these policies HARD.

Not many people are willing to fork over $400 per month, so what happens is the agent talks them down on the amount of insurance to say $100,000, which costs $1000 per year, which the client can afford. The agent still makes 4 times the commission of the Term Insurance sale, but the client is now drastically underinsured. 

Moral of the story, be sure to know what you are buying and for what reasons. Don't be afraid to get a second opinion. Ask friends or family what kind of insurance they have, and why. Better yet, ask how the agent is getting paid, and ask how much. We legally have to disclose that we are being paid a commission, but nowhere does it require us to state dollars and cents. Ask that question, if your agent gets nervous there might be a reason why.

--
Robert Reynolds, GBA
Certified Group Benefits Advisor
Hendry McKenzie Reynolds Employee Benefits Ltd.

Toll Free: 1-888-592-4614
rob@hmrinsurance.ca
www.hmrinsurance.ca

E.O. E.