Fear, Greed and Commissions

A big complaint against life insurance is the supposed “huge” commissions an agent earns when you purchase a whole life insurance policy.  It’s been said that when dealing with money there are only two motives that drive your decision, “Fear or Greed.”  Those who oppose life insurance attempt to paint all life insurance agents as greedy in order to scare you from doing the right thing, protecting your family and leaving a legacy.

Suppose you are in your mid-thirties and in good health.  Suppose also that you are purchasing a life insurance policy that costs $1,000 a month and your identical twin is investing $1,000 a month.  And suppose you both continue doing this over the next 30 years. Which of you will end up paying more for your purchase?  You or your identical twin?

Naturally, your answer will depend upon the fees associated with the investment and the commission scale for the life insurance agent.  But knowing these facts, you will be able to know if someone is telling you a big whopper about “greedy” life insurance agents.  So, let’s get going.

With a 1% fee on a $1,000 per month investment earning 6% annually, the cost of the fees alone will be over $22,000 at the end of year 15.  Inherently, the higher the annual earnings are in your identical twin’s investment portfolio, the higher the cost of the 1% fee will become. That is because fees are charged based on the total amount of capital in the portfolio at the end of the year.

Comparing this cost to the commissions paid to your life insurance agent for the $1,000 per month policy that you are purchasing, is like night and day.  Commissions vary by company and individual agent performance but using ballpark figures, your agent could earn a commission from the insurance company somewhere in the neighborhood of $9,700 over a 10-year period. After that, your agent will earn nothing, unless they are a captive agent and then they may continue to earn a commission as long as you pay your premiums. Yet, the fees your identical twin must pay will keep going up.  By year 30, your identical twin will have paid over $100,000 in fees!  That is 928% more than what your “greedy” life insurance agent has earned in commissions.

But here is the clincher.  The commissions paid to your life insurance agent came out of the insurance company’s expense account, not your earnings, even if the agent is a captive agent.  Your premiums purchase your life insurance coverage, which thirty years down the road is over $1.3 million.  Over half of that is liquid cash value that you can access and use tax-free for whatever purposes you choose.

The $100,000 plus in fees that your identical twin has paid have come right off the top of your identical twin’s earnings.  Those fees have cost over 17.6% of the total investment earnings.  Now, in order to access those earnings, your identical twin has to pay taxes! And those taxes will cost an additional 15% to 35%, depending on what type of investment your identical twin made.  This leaves your identical twin with less liquidity than you have in your life insurance policy and absolutely NO life insurance coverage!

Who are the greedy fear mongers in your life telling you to avoid whole life insurance like the plague while laughing all the way to the bank on the fees they collect from you?  “Figures don’t lie, but liars do figure.”  Don’t believe anybody when it comes to your money.  Know the facts!  Then act accordingly, and don’t let fear or greed get in your way of keeping more of the money you make.

Your money is an extension of your values, and you should be the one who decides how that money gets spent, not somebody who is using fear or greed tactics to discourage or entice you to let them manage your money for you.