by Sydney Presley, LifeTrends Managing Analyst
Imagine yourself as a life insurance agent (probably not too far off for many of you). You sit at your desk thinking about your job… this is your livelihood, why you go into the office every morning, how you make money, the meaning of your existence (just kidding). But you do take pride in your job. Not only are you able to make a living, but you are able to help your clients plan for the unexpected as their trusted advisor. They benefit from the protection a life insurance policy brings, while you benefit from the commissions on the policy. The bulk of your commissions are based off the amount of premium paid on a policy in the first year that it is sold. But what if the premium in the first year doesn’t quite maximize your earning potential for that product? Instead of waiting for that 2nd policy year to pay the second-year premium, you go ahead and send in that 2nd premium a month or two early. This way, at least a portion is on a higher 1st year commission schedule, and it won’t cost your client any additional cash. Whether it is to maximize commissions, client/CPA directed, or a variety of other reasons, what could be the harm? To further investigate this question, we took a closer look at No Lapse Guaranteed policies and what would happen to their guarantee period.
Loss of Guarantee Period
The short answer is this: be aware that you could lose 30% of your original guarantee period by using this strategy. As is the case with many types of life insurance policies, the timing of payments can be instrumental in the success of the policy in the future. In our test, we illustrated the early premium scenario by scheduling double the NLG premium in the first year, paying $0 in the second, and the original guaranteed premium in years 3+. In the end, the effect is consistent within a product; however, it completely depends on the product being illustrated. A little over half of the products made absolutely no difference if there was double the premium in the first year with 0 in the second, while the rest on average lost anywhere from 10 to 20 years off the life of the guaranteed policy.
Current Market Pricing and Rolling Targets
While this might make you want to investigate each and every product out there, it should be noted that this “strategy” might be a bit outdated for most products for two reasons. The first being that over 60% of the current NLG market has either the same or higher full pay premiums than target values, meaning that the first-year premium would already maximize your commissions. This has not always been the case as just looking back 6 years shows a switch. While today’s market, has roughly a 60/40 split that premiums are higher or the same, 6 years ago the situation was flipped with a 40/60 split. The second reason being the invention of ‘rolling targets’ which mutes the necessity of needing to input premiums early*. This means that if the original situation were to arise, and you aren’t maximizing your commission earning potential in the first year, the second-year premium would automatically be counted on the higher commission grade without having to put in the premium early. This allows you to maximize your earnings without having to risk the integrity of your client’s underlying policy. A win-win for everyone.
While universal life policies are touted for having more “flexibility” than whole life, the timing of payments is still important for ensuring that the policy doesn’t come across any hitches. In the current market, there isn’t much need for this early premium strategy as most products are designed with rolling targets and have shifted to having higher premiums than target values. Changing up the premium pattern can be a dangerous game and might affect the integrity of the product being sold – it likely isn’t worth the risk.
*Rolling Targets not available in New York.