Insurance Fees, Revealed
April 1, 2012 by Leslie Scism
By LESLIE SCISM
It long has been one of the most tightly held secrets in the financial-services world: what your insurance agent is paid.
That might be about to change, thanks to a new regulation in New York.
Agents and brokers in the state now are required to alert clients, in writing, how they are being compensated, and to provide specific details to clients on request. In March, the rule—which originally took effect in January 2011—survived an appellate-court challenge by an agents’ group.
TIAA-CREF is often recommended by experts.
The organization, the Independent Insurance Agents and Brokers of New York, says it won’t appeal and will focus on helping agents comply with the rule, known as Regulation 194.
Other states have been monitoring developments and may craft similar disclosure rules, some experts say. In the meantime, you can take the initiative and ask the agent to disclose his commission—and if he doesn’t give you an answer, consider shopping elsewhere.
Agents’ commissions can be steep, but they aren’t readily apparent because they are paid by the insurer. They matter to consumers because an insurer paying a low commission generally will have more room to be generous with consumers in annual interest or other product features.
For many popular types of annuities, commissions run from 5% to 7% of the invested amount, and some insurers pay 8% or more to agents. The disclosure could be a starting point for a conversation about whether a lower-commission version of the product, or a different product, might offer greater value, consumer advocates say.
Richard Poppa, president of the New York agents’ group, calls the rule a “solution in search of a problem.” He maintains that it is burdensome to agents and brokers because of the record-keeping it entails, while “only a minuscule number of consumers have asked their agents for compensation information.”
Guardian Life Insurance Co. of America is often recommended by experts.
The rule already has had an effect nationally. Officials at the National Association of Insurance and Financial Advisors say New York’s effort prompted the trade group to change its own policies regarding disclosure of commissions. Now, it encourages all of the 45,000 agents who belong to its state and local associations to fully disclose all commission amounts if a consumer asks, for both insurance and securities products, whatever state they are in, says NAIFA President Robert Miller.
Previously, the group gave members no guidance on whether they should disclose their compensation, but generally opposed government requirements that agents do so for life insurance and annuities.
Agents, for their part, say their upfront commissions for products like annuities aren’t outsize when viewed in terms of the years over which a product is owned. The commission can turn out to be less on a per-year basis than what many people pay their financial advisers annually, about 1% of the account balance, to oversee a portfolio of stock and bond mutual funds.
Here’s what you need to know about commissions before talking to an agent.
Life insurance. The selling agent, and others in the sales structure, often receive upfront commissions and other compensation totaling more than half of the first-year premium. This can amount to hundreds of dollars in the case of “term” life insurance, which provides a death benefit for a specified number of years, or thousands of dollars for “permanent” life, which combines a lifetime insurance policy with a tax-advantaged savings component.
The commission is more important with permanent life. To see the impact, look at the “illustration” provided by the agent of the projected cash-surrender value over time. In large part due to the commission, there may be little cash-surrender value in the first year.
There also are annual charges for the death benefit and administrative costs. The Consumer Federation of America says a smart option is buying from TIAA-CREF, a highly rated insurer that sells policies through staff employees and has low overall costs.
Another option: a “blended” permanent-life policy, which incorporates ample amounts of term-life insurance as a way to hold down the cost. Because agents receive smaller commissions for these versions, though, they may not readily pitch them.
Peter Katt, a fee-only life-insurance adviser in Mattawan, Mich., says it is also important to focus on insurers with track records of delivering long-term value, including through dividend payments. Among his favorites: Guardian Life Insurance Co. of America, Massachusetts Mutual Life Insurance and Northwestern Mutual Life Insurance.
Annuities. These are tax-advantaged savings and retirement-income policies. One hot product is the “indexed” annuity, in which the annual interest is tied to market benchmarks. The contracts are aimed at yielding more than bank certificates of deposit, with guarantees against loss of principal. Commissions currently average 6.3% of the principal payment, says Sheryl Moore, founder of AnnuitySpecs, a market-research firm.
“Variable” annuities are a tax-advantaged way of investing in stock and bond funds. Upfront commissions recently have run 4% to 7% or so of the invested amount, paid by the insurer. As with permanent-life insurance, they also carry annual fees. Fees in versions with generous guarantees of lifetime income can top 3.5% a year of the account balance, which is a serious drag on your funds’ returns.
Another downside: Annuities typically come with financial penalties on principal withdrawals in excess of a specified amount. Penalty periods can stretch 10 years, and in general, the higher the commission, the higher the penalty.
Auto insurance. Independent agents, who can provide quotes from multiple insurers, earn about 15% to 20% of the annual premium, or $150 to $200 for a policy with a $1,000 annual premium, says Kevin Delaney, director of insurance at First Niagara Risk Management.
The Consumer Federation recommends consumers shop around to get quotes from insurers that don’t use agents, such as Amica Mutual Insurance and USAA (for families with military ties), and then ask an agent to beat the best price.
Write to Leslie Scism at leslie.scism@wsj.com
A version of this article appeared Mar. 31, 2012, on page B8 in some U.S. editions of The Wall Street Journal, with the headline: Insurance Fees, Revealed.
