Compensation Will Be The Issue For 2005 Its an issue that most companies and agents really havent wanted to discuss

By Michael Pinkans

Its that time of year againmaking predictions about which life contracts will sell in the retail marketplace in 2005. Will whole life continue to make a small, but sustainable, comeback? Will universal life, with the addition of no-lapse guarantee riders, continue to command a majority of industry sales? Or will variable universal life finally make a comeback as individuals begin to feel more comfortable with a rising equity marketplace?

Yes, yes and yes. However, that wont be the No. 1 issue in 2005 concerning life insurance. I predict that the No. 1 issue for 2005 concerning life insurance sales will be compensation. Its an issue that most companies and agents really havent wanted to discuss, but the marketplace has changed and will continue to change, forcing a rethink on this issue. It doesnt necessary mean that compensation will be universally forced lower, although it will on some contracts, but we will see more levelized and fee-based life contract compensation and cuts in all noncash compensation. The result will be to produce higher initial permanent life cash values for the customer. Customers will demand them in many situations and ultimately, companies will see improved persistency.

Compensation changes will come in 2 forms: overt and covert. The overt changes will be companies openly offering certain contracts with lower load/levelized commission contracts to maximize early policy cash values. These companies see a competitive advantage in these contracts by basically offering a COLI-lite for the individual retail marketplace. There are a number of reasons for this.

While the whole issue of “contingent commissions” affecting Marsh, AON, AIG and other companies really doesnt have anything to do with retail individual life insurance sales, the public doesnt know that. Consumers only need to hear the word insurance in a negative light and the whole industry is broad-brushed with an uncomfortable feeling. So, as we begin to see commission transparency being demanded by consumers for the negotiated business marketplace, once that happens, the retail customer will begin to ask about it on the individual life side.

The COLI marketplace also has suffered as many public companies have cut back on their purchases. However, theres a plethora of COLI expert agents who are seeking now to sell in the upper-end individual marketplace. And the contracts theyre comfortable selling? Those with higher early cash values. Why not ask for this type of contract on the individual side?

Competition. Its there. For years, the insurance industry has braced for competition from other financial services companies such as banks and mutual fund providers. These firms continuously are looking for expanded distribution and profitability. What better way than to offer a contract thats not viewed as just another commodity? Even forgetting outside competition, whats been the overall growth rate of life insurance sales over the past 20 years? Answering “very low” is being kind. Changing the compensation mix could lead to life contract designs that are easier to sell.

Theres also another reasonsome producers are asking for them. Theyve never bought into the 10 calls, 3 appointments, 1 sale model and are looking to deliver a policy that provides more upfront value to the customer.

The covert compensation changes? Which insurance companies are really selling their products within pricing allowables? Even if there are a few, are these companies getting the return on investment results they need? Has anyone experienced renewal compensation changes? Higher production requirements for sales conference attendance? Benefits cut back? While not always direct, total compensation has been decreasing.

Realistically, will these new and reformatted contracts affect all purchasers of life insurance? No. Because of cost of distribution, I suspect that the true middle market will not have these lower load/levelized commission contracts available to them. However, the “mass affluent” to “affluent” marketplacethose individuals who are already comfortable with their investments “wrapped”are more than ready.

Michael S. Pinkans, CFA, CFP, CLU, ChFC, is a registered representative and investment advisor with Equity Services Inc. and vice president of sales and promotion at National Life Insurance Company, Montpelier, Vt. His e-mail address is mpinkans@nationallife.com.


Reproduced from National Underwriter Edition, December 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.