Physicians have financial risks like everyone else, usually however with much dire consequences if not properly minimized. Two large risks for physicians that are easily protected with proper insurance coverage are the risk of premature death (covered by a life insurance policy) and the risk of becoming disabled while still in practice (covered by a disability income policy). These two types of insurance policies can typically generate a substantial premium, depending on the dollar amount of coverage, and on what type of insurance is used with the life policy (term or permanent cash value) and how many bells and whistles the disability policy contains. Traditional insurance companies that provide these types of policies typically pay their agents/brokers an upfront commission that often approximates the amount of the first year premium. Therefore, a commissioned financial advisor can easily have a $3,000+ payday when selling a physician a disability income policy and an even bigger payday going to five figures+ when selling a physician a permanent cash value life insurance policy. This does not include the much smaller annual renewals either. As a fee-only physician financial advisor, I never charge a sales commission, but rather work with an outside insurance agent or work with a low load insurance broker that will provide quotes and benefits that the physician and I can then decide the best course of action. Acting as a fiduciary for my physician client, I will often recommend a term life policy with period certain for my client that will sufficiently cover the risk of premature death at a fraction of the premium of a cash value life insurance policy for the same dollar amount of coverage. It is easy to see why some financial advisors that are registered representatives (i.e., not fee-only) seem to focus on disability insurance and cash value life insurance for their physician clients. Of course covering these risks is necessary for the physician, but a complete financial plan for a physician involves a lot more than covering these two potential hazards.
Why is the Traditional Life Insurance Agent/Broker Compensation Model Still in the Stone Age?
The current structure of the life insurance industry regarding cash-value life insurance policies with most major insurance companies is to reward the selling agent with the entire commission upfront on a newly issued policy. The criticism to this practice is that this of course reduces the needed client-agent reviews and interaction and generates more “churning” and “flipping”. Unscrupulous agents are tempted to sell clients another policy for another commission rather than encourage them to maintain and keep their existing policy, which most likely would have lower costs than any new policy considering the client was younger and most likely in better health with the existing contract. A model in which the insurance agent would have a financial incentive for their client’s continued patronage could create a win-win for both parties. We see this “pay as you go” model currently operating successfully with wealth advisors and property/casualty agents, why not traditional life insurance agents?
There are some flaws to this argument. First off, the reality is that the captive life insurance industry and the broker sold life insurance industry and their agents/brokers prefer this form of lump compensation. The claim is that selling an individual a life insurance policy (the ultimate intangible product) is hard work, and likewise the 70% – 105% of the first year premium is fair compensation for the efforts. For existing agents to reduce their current income to a fraction of this commission upfront, and convert it into a trail over a multiyear period is actually quite distasteful. That would be a lot of macaroni and cheese dinners for many years before an agent’s income could recover. Therefore, this change will likewise not be initiated from the insurance agent or insurance industry side unless other forces prevail.
Direct Quote Insurance on the Rise
The drive by the consumer to change this up front lump form of compensation has not yet presented itself in full force. After all, why does the consumer care about how the agent is paid if the consumer is satisfied with the end result? One must acknowledge that the drive to reduce commissions and up front loads in the investment advisory business was driven by the consumer that insisted on lower fees and costs. However, the relevant costs of a life insurance policy are not quite as obvious. Only by comparing a quote from different companies can a consumer compare costs, and even then it is unknown and not understood how the pricing mechanisms used by the insurance company work. How does one calculate mortality risk expense anyway? The advent of direct sold policies however is decreasing the cost of life insurance (there is no big commission check written to the selling agent) and is hitting the radar of consumers. The consumer can notice any price and feature differences if the consumer compares the proposed agent sold policy and premium with one sold directly by a direct seller financial institution or association. These companies have a work force of sales people that are compensated primarily on salary. Likewise the company can structure more competitive pricing, and in effect offers a levelized cost (in place of commission) insurance product. I would emphasize that a physician would be wise to work with a financial advisor that has a fiduciary duty in helping them analyze the different policy features and costs when use direct insurance quotes, as the cheapest policy premiums are often not the best choice. This is especially true when comparing disability income policies, as features on one disability income policy can be quite different and complex when likened to another.
Mark Maurer, CFP of Low Load Insurance Services believes that a levelized compensation basis will not occur unless all the insurance companies were to go to such a plan all at once. If an agent can “pick and choose” he/she may use a “leveled compensation” policy when in a competitive situation, as such a policy should in theory make a policy more inexpensive. An agent would then use the higher “front-end” policy when there is a large up-front premium or in a scenario with limited competition. Mark believes the answer to the whole argument is full disclosure. Both agents and insurance company home offices would not want the purchaser to know that 100% or more of their premium is going to sales costs. Only then would insurance products then get better.
The insurance industry has a powerful lobby in Washington that has historically resisted change. I believe that only market pressure will cause a change in this decades old insurance industry practice that has made many life insurance policies expensive and inefficient. Pricing from direct sold life insurance companies will be the impetus that drives the old-line insurance companies to restructure their commissions to agents. I remember the days of 8% load mutual fund commissions and minimum $60 dollar commissions on stock trades in the late 1980’s when I first got into the business as a stockbroker! That is an inflation equivalent of more than $105 a trade minimum commission. The current investing world that pays $7.95 to $15.00 a trade today would laugh at these costs. When the physician consumer realizes, through full disclosure and outside competitive market pressures, that life insurance protection can be more affordable from other non-traditional channels, then he/she will insist on a better, more affordable product. Then the big agent/broker/registered representative driven life insurance companies will have to change their commission structure. The transition is currently in process. Only time will tell now.