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The Dirty Secret Behind Life Insurance
There is a dirty secret behind life insurance that no insurance agent in his or her right mind will ever want disclose to you. That secret has to do with how much commission they will earn for the life insurance products that they sell you.
Let's say that you're considering $1,000,000 in coverage and are trying to decide whether you should buy a term life insurance policy or a whole life policy. A potential conflict of interest can arise in your insurance agents' mind because of the difference in what they will earn.
As you probably know, a term policy will cover you for a specific amount of time. Once that time has passed (presuming you're still alive) you will lose your coverage. However, you may be able to renew it at a higher cost.
A permanent life insurance policy, on the other hand, will cost you a fixed premium until you are 100 years old. At the beginning of the policy the actual cost of insurance will be less than when you are older. So, what happens is that any excess will be put into a reserve fund. Then, when the cost of insurance rises beyond the amount of your premiums, the difference will be withdrawn from those reserves.
Depending on the type of policy you own the reserve fund will either be in an interest earning account or it might be invested in funds that are similar to mutual funds. Keep in mind, too, that whole life policies can be cashed out if you feel you no longer need and/or want the insurance whereas tem policies have no residual value.
Life Insurance Commissions
Now let's look at the commissions on that million dollar policy. For simplicity's sake, let's say that you're a 45 year old male who is in excellent health.
Your monthly premium for a million dollar 20-year term policy will be around $120.00. The monthly premium on a million dollar universal life policy will be in the neighborhood of $665.00. It's certainly a considerable difference. But remember that you're covered for life with a universal policy.
However, you will also help to cover your agent's life with a whole life policy because many insurance companies pay their agents around 70% of the first year's premium and 5% every year thereafter. The commissions on a term policy can often be as high as 100% of the first year's premiums - but that's it.
So, in this example, your insurance agent will earn about $5,600.00 if you buy the universal life policy and only $1,400.00 if they sell you the term policy.
A simple question: if you were in the business of selling life insurance, which policy would you try to sell?
Knowledge is power. Use this information wisely.
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