David Woods On Commissions
To The Editor:
I would not normally argue with my longtime friend, mentor and predecessor, Jack Bobo, particularly since I seldom win when I do. But I think he is wrong when he compares the commission of 2%-3% on a single premium sale to that of a real estate commission of 6%-7%. Hes on the right track, but hes comparing apples and oranges.
The 6%-7% real estate commission is multiplied by the sale price of the real estate being sold. The 2%-3% single premium life insurance commission is multiplied by the premium paid. To make a fair comparison the dollar amount of insurance commission must be divided by the face amount of the policy to determine the true percentage rate. The value of a single premium policy (or a recurring premium policy for that matter) is the value to the beneficiaries. Thats what the buyer buys, not the amount of premium paid. Just as a home buyer buys shelter worth so many dollars, the insurance buyer buys financial security worth so many dollars to his or her beneficiaries.
To make it clear, lets suppose a $500,000 single premium policy costs $250,000. At 2% the commission is $5,000. But as a percentage of the value to the beneficiaries$500,000the commission rate is only 1%. On the other hand, the commission on a $500,000 home at 6% is $30,000. That is a true apples and apples comparison.
Jack was making the right point, he just didnt make it as well as he could have.
On one point Jack and I agree completelyand this was his main point. Commission disclosure can be very misleading and is certainly an incomplete representation of the cost of a policy. In fact, an actuary I once knew said the true cost of a life insurance policy cannot be known until the last beneficiary dies. Life insurance is so simple and yet so misunderstood and too often misrepresented.
Thats tragic for too many families and businesses in this country today.
David F. Woods, CLU, ChFC, LUTCF
CEO, National Association of Insurance and Financial Advisors
President, Life & Health Insurance Foundation for Education
Karen Ignagni On LTCI
To The Editor: