One of the most hotly contested topics in life insurance is whether whole life insurance is worthwhile or an overhyped commission grab. Those on both extremes of the spectrum can leave clients feeling sold to, rather than advised. If you've ever been presented a product before you've even said what you want or need, you're not alone. It's an incredibly common practice and all it takes is a quick Google search to see it's one of the most common things people call out online, usually a friend, family member, or community member who presents themselves as an 'advisor' who has 'the solution' before they even knew the situation.
Many of the responses will tell you they do it for the commissions... Whole life pays more and is more expensive so agents push whole life. It sounds good, and it's not entirely wrong, but there's much more to the story.
Are the commissions really better?
While it is true that permanent products (whole life, universal life, indexed universal life, final expense, etc.) generally pay a higher commission percentage than term insurance, 'higher' isn't fully accurate either.
The carriers that we work with pay a range of commissions. For term life insurance, the commissions generally fall in the range of 65-90% of the first year premium depending on the length of the term and the underwriting class. Permanent policies (whole and universal life) generally fall in the 70-90% range. In many cases, the rates for a term or permanent policy are comparable, but there are term products that pay higher commissions than permanent policies.
If the commissions are so close, why is permanent insurance known for lining the agent's pocket?
Commissions are paid as a percentage of the annual premium--it's the premium where the real gap exists. A permanent policy will typically cost someone 5-15x more than the same amount of term insurance. Given that the commission percent is similar, the premium is what provides the bump in commission dollars. For instance, a $500,000 term policy might produce the same commission as a $50,000 whole life policy.
Another peek behind the curtain that people don't usually know: commissions are often 'advanced' up front, but earned as the premium payments are made over the first 12 months. If a policy lapses, gets cancelled, or the insured dies during that period, the insurance company charges the agent some or all of that commission. An agent who sells a product the client can't afford or doesn't want doesn't just lose future income, they can be charged for the money they've already received.
If commissions aren't the whole story, what's actually happening?
In our opinion and in our experience, the issue isn't term life vs whole life at all... It's the mechanism by which an alarmingly large portion of life insurance agents are recruited, 'trained', and end up in front of clients.
In order to become a licensed life insurance agent, you need to take your state's licensing exam. In some states, like Massachusetts, there are no educational requirements--you can sit for the exam having never taken any pre-licensing classes. Once licensed, getting non-resident licensure in other states is often just a fee and a form, with no state-specific training. Because of this, a significant portion of the industry is built on a recruiting model: get licensed quickly and put them in front of their own warm market (friends, family, coworkers, etc.) as fast as possible. In many cases, these presentations are framed as 'training' and often occur before the agent is licensed, meaning their 'trainer' collects the commission from any sale made, as a non-licensed person cannot be paid an insurance commission. The faster they get licensed and selling, the faster they (and the folks that recruited them) make money.
In these models, there is generally 'training' to pass the exam. While this may teach some terminology and basics, the goal is to pass a licensing exam, not to get a full understanding of underwriting, needs analysis, or product features. Once licensed, 'training' usually consists of meetings which are more pep-rally than product knowledge. The focus is often on celebrating those who have closed sales, and using the excitement to build momentum and motivation. It is incredibly common for these models to teach buzzwords such as "fiduciary", "financial professional", etc. which are used in an incorrect or misleading way.
An insurance agent is not a fiduciary1. A fiduciary is a person, business, or organization that is legally and ethically bound to act solely in the best financial interest of another party (their client). Insurance agents who sell only life insurance are held to a 'suitability' standard. This means if the product they are selling is even remotely applicable to the client's situation, they are in the clear. A 'captive' agent (one who contractually can only sell their own brand's products) in a recruiting-heavy firm claiming they are a 'fiduciary' is like a waiter at the Olive Garden claiming to be a neutral, certified nutritionist. While the waiter may genuinely believe the salad is healthy, they are legally and contractually banned from offering or recommending healthier options at a restaurant next door. They are paid to sell the pasta on their own menu.
Complicating issues further is the compensation structure hidden in this model. Most agents in this model don't start out making a 'full' commission rate at all--they start with a lower contracted rate and only climb as they achieve recruiting and production benchmarks. As they recruit and make sales, their commission rate begins to climb, earning an 'override' or the difference between their contract level and their recruit's contract level when their recruit makes a sale. This means that these new agents, with minimal training, are put in front of clients and incentivized to sell the product with the highest commission since they're only getting a percentage of what is earned... And they are also incentivized to recruit others, despite having limited experience and training as well, earning titles like 'trainer' or 'mentor'.
New agents in these systems aren't usually bad people trying to manipulate their family and friends. Most believe what they're saying because they were taught to believe it by people who were taught the same way. It's often asked, "was this a scam?" when it's really a matter of "he was trained to believe in the product, and that it was right for everyone, because no one taught him how to figure out what was actually right."
Case Study: "Infinite Banking"
One common example where this frequently shows up is in the concept of "infinite banking". The concept itself isn't a scam--it is a real strategy based on overfunding a permanent life policy and later taking loans against the accumulated value. For the right person, in the right circumstance, it can be a solid piece of their financial plan.
The problem is that this method is being pitched universally, to people it was never intended for. Without the necessary stream of steady, discretionary income, the plan falls apart. The strategy is to overfund the policy--which means you have to have the money to overfund it with. When sold to the wrong person, it goes from strategy to an expensive permanent insurance product dressed up as a strategy... Leaving people with a premium payment they can't afford, and having to choose whether to maintain the account or lose money to cancel it.
Advice: What does it look like?
Though it gets a bad rap, permanent life insurance isn't inherently good or bad, nor does it mean that anyone who sells it is doing wrong by their client. Permanent policies are the right tool for specific situations, but like any life insurance product, it isn't a one-size-fits-all solution. The product isn't the problem. I have seen permanent policies work for:
- Business needs that are permanent (such as buy-sell agreements)
These agreements last as long as the business does, and as such are a permanent need. - Clients who have maxed out other tax-advantaged savings.
Permanent policies can be part of your tax strategy. They're usually not the first tool in your toolbox, but can be very useful as part of a more robust strategy. - Peace of mind
Some clients just want permanent coverage, and that's ok. If you prefer knowing that your policy won't end in 10, 20, 30 years... It's ok to choose whole life (of your own wishes--not because someone forced it on you.) - Final Expense Coverage
With simplified underwriting, and more generous requirements, these policies are often a good fit for those who are older or with chronic health conditions who are looking for a smaller policy to cover final expenses.
Solid guidance is based on an individual's needs, not a particular product. An agent who presents a product or solution before asking you about your situation should raise a red flag. At a minimum, your agent should be asking about your income, your goals, your debts, your dependents, and your budget. Ask the agent--why this and not something else? Listen for real answers tied back to your needs, not buzzwords, and beware of agents who bestow upon themselves titles which are meant to garner trust-not simply indicate their profession or role.
- Some insurance agents are also licensed investment advisors. In this case, they may be a fiduciary, however, the fiduciary role generally applies only to the investment advice, and not to life insurance products. ↩︎