Monday, April 23, 2012
Regulation 194 in New York requires insurance agents to reveal their commissions to their prospective clients. While it is usually the case that commissions are unknown to the public because the insurer pays them, they can be important to prospective clients because of their affect on the annual interest of a policy or annuity. If an agents receives a low commission, then that agent will probably be more flexible and offer a better annual interest rate or provide alternate products that may provide a greater value for the client. Even though Regulation 194 first began in New York, it has had a national effect on the insurance market. The regulation has prompted agencies, such as the National Association of Insurance and Financial Advisors, to change their policies to encourage their agents to disclose their commissions.
So, what you do prospective clients need to know before talking to an agent?
- Whether your agent is receiving an upfront commission from a "term" or "permanent" life insurance policy. The commission becomes important with a permanent life insurance because it is possible that there will be little if no cash-surrender value in the first year.
- Clients also need to be aware that there are other charges for administrative costs and even from the death benefit; therefore, the Consumer Federation of American suggests that a client purchase a policy from the TIAA-CREF, which offers policies with low overall costs.
- A client can also choose to purchase a "blended" permanent-life policy. This type of policy mixes term-life insurance to keep costs low.
- Clients should only purchase policies from insurers who have a good track record.
- Clients should also look into annuities as an alternative to life insurance and ask about "indexed annuities." This type of annuity is set to market benchmarks, which are used to protect against a loss of principal. Unfortunately, there are also problems with these annuities. The commission on most annuities is still between 4% and 7%, they still carry annual fees, and they often have financial penalties should a policyholder withdraw more than they are allowed under the policy. The higher the commission, the higher these penalties.
- Commissions can also affect auto insurance.
See Leslie Scism, Insurance Fees, Revealed, Wall Street Journal, Mar. 30, 2012.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.