For decades, insurance companies have debated the issue of leveling out–or “levelizing”–commissions paid to producers who sell life insurance products.
The discussion has had its share of controversy. The approach has been favored by some interests but rejected by others, due to the impact levelizing may have on producer income, product pricing, marketing and more. Still, in the worksite life insurance market, producers and insurers may find the plusses outweigh the minuses.
To see why, we will look at an example of the way worksite life insurance commissions could change if they were made level. Then, we will discuss possible reasons why it is in the best interests of the producer to consider making a switch to a levelized commission pattern.
A levelized commission means that the company has reduced the first-year commission but increased the renewal commissions associated with sale of the insurance policy in question.
An equal commission rate in all policy years is the ultimate in levelized commissions. However, this may not be an acceptable option for producers, especially when making the first step in changing from traditional first-year commissions to levelized. Instead, a reduction of 20% to 30% in the first-year commission rate with an increase in renewal years may be more acceptable.
The chart on this page shows why such a shift may be in the producers long-term best interests. The chart compares the commission paid on a worksite universal life product assuming three commission patterns. The values are based on an eight-dollar-per-week premium, using a model that encompasses a variety of issue ages and risk classes.
Each commission pattern is priced in such a way that the insurance company obtains the same profitability from the product. (Profitability is measured in terms of the internal rate of return on the initial investment of the insurance company.)
In this example, it is assumed that the policy persistency rates did not vary based on the commission pattern, so the outcome is more conservative than it might be in everyday life. That is because levelized commission patterns may well produce higher persistency rates. This might happen due to the increased service the producer will likely provide to the worksite group.
Therefore, the total commissions paid for the levelized commission patterns may be even higher than what is shown in the chart.
Even without incorporating the persistency advantage, however, the chart shows that there can be several advantages to electing a reduced first-year commission.