Are Life Insurance Commissions on Their Way Out?

The average commission generated by a life insurance policy varies depending on the type of life insurance in question.

For example, the average commission on term insurance is 30 to 70%, while it is 90 to 105% on whole life insurance products. Of course, what we’re talking about here are the first year commissions, commissions for subsequent years drop much lower to an average of 4% a year for term insurance and 6% annually for whole life insurance.

Life insurance commissions are generally broken down into three components.

First Year Commission (FYC): This amount is a percentage of the total premium. It ranges from 40% to 60%. The FYC is generally higher among permanent policies, such as Whole Life or Universal Life, when compared to term policies, but many insurers have been lowering the FYC rate on their permanent policies, especially guaranteed permanent policies.

Production Bonus: This is a multiple of the First Year Commission. The bonus rate is generally higher for higher producing brokers, but this does not translate into consumers paying a higher rate. It simply means the Managing General Agent (the go-between between the insurer and the consumer) makes a smaller cut on higher producing brokers. This makes sense because these brokers tend to be more experienced and need less training and hand-holding than newer brokers.

Renewals: This is the amount the broker receives each month starting after 13 months. The percentage ranges from 2% to 8%.

Insurers charge back the brokers commission if the policy cancels in the first two policy years and some insurance carriers have persistent bonus schedules, which penalize chargebacks at any time.

All life insurance distribution channels have associated costs. If the insurance companies are not paying commissions, they will be paying another type of distribution cost, such as salary or online marketing costs.

With that in mind, we asked some of Ontario’s foremost insurance industry experts whether they thought commissions were on their way out of the life insurance business, and here’s what they had to say in answer to that question. 

Insurance broker William Shung points out that banks with a life insurance arm or insurance companies with a banking arm will always attempt to sell life insurance direct because they know their advantage is a big direct marketing data base. As a result, he contends that it becomes more and more difficult for life insurance brokers to earn commissions and the brokers who will suffer most are the new brokers and they already are.

“We are experiencing fewer and fewer young people in the life insurance business,” he says.

Ami Maishlish, who has been in the insurance business for almost 40 years and is president and CEO of CompuOffice Software Inc., believes that thanks to the proliferation of Internet, along with the large client databases and marketing capabilities of banks that have merged with insurance companies, selling direct has become much easier and this will eventually lead to the obsolescence of commissions and the need for brokers in the family and single needs life insurance market, which sells term insurance, term 100, and basic whole life policies.

“The interim stage we’re currently experiencing of the direct market mixed with the independent broker will likely last for the next five years or so before the traditional independent agent is phased out of these lines of business to be replaced by financial institution owned and operated term-o-matic and call centre combos or through such combos outsourced to licensed MGAs and/or unlicensed operators,” Maishlish predicts.

Should his prediction come to pass, Maishlish believes this will eventually cut out the “family” and single-needs part of the business, leaving only the parts that require knowledgeable and trained human intermediaries or advisors like estate, business, and tax planning and overall financial advice to the upper middle class and the wealthy.

He also points out that there’s already pressure from financial institutions to do away with commissions and replace them with fees because that makes financial sense to the financial institutions, as it would cut down on their distribution costs and increase their profit lines. It is also more likely that the upper middle class would be prepared to pay fees to advisors for the added value received.

Tamara Humphries, another Ontario broker based in Markham, will tell you that if commissions did fully disappear, as Maishlish hints, you would see a drop in quality when it came to service to the client.

“The products sold without commission tend to be products with claim problems because there is no agent or broker to advocate on behalf of the insured,” she says.

Advocis agrees with Humphries. The Financial Advisors’ Association of Canada, says that banning commissions, as Australia and the UK had already done, would hurt advisors and clients alike.

“Plans sold to consumers without an agent tend to have more declined claims and product lines sold without commissions paid to agents tend to have lower productivity than those lines sold with commissions paid to advisors,” confirms Humphries.

Not only that, but it will also raise the cost of doing business. Need proof? Advocis would have you look at the other countries where commissions are already banned.

In Australia, the Future of Financial Advice (FOFA) reforms responsible for getting rid of commissions there, established a best interests’ legal duty and expanded requirements regarding fee disclosure, says Advocis. These changes increased the costs to serve  clients above 30%, and compliance costs for advisors have so far totalled AUD $700 million. In the UK, the reforms banning commissions caused the number of advisors to drop by 25% in that country.

What’s worse, the clients that have the most difficulty affording fee-for-service arrangements are those in the low- to middle-income range. Plus, it doesn’t take a genius to know that those with assets under $100,000 make up 80% of the market in Canada, so doom could be coming if banning commissions makes financial advice more expensive. 

“We need a system that serves investors at all income levels,” says Greg Pollock, president and CEO of Advocis. “Given Canadians’ concerns around cost of living and retirement readiness, it’s critical that more people are able to seek professional financial advice.”

“If we can get to a disclosure model that’s appropriate, then consumers could make the choice,” says Pollock. “If my embedded commission is $1,000, or whatever that number is, then you have a choice, as long as they disclose that.”

Even Maishlish will tell you that though commission as it is traditionally thought of will disappear in ten or twenty years, it will still be around in the form of back-door incentives like trips, referral bonuses, and discounts. 

William Shung remains slightly more optimistic. “Commissions are here to stay because they will never achieve 100% of the market by selling direct so there will always be business for the individual brokers to pick up,” he affirms.

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  • Sandi Martin
    October 24, 2013 at 3:54 pm

    I’m very curious to hear about fee based insurance. As a consumer, I be willing to pay for advice that was completely separated from a commissioned product. If I could pay an experienced insurance person to give me the lowdown on all the products and I knew they weren’t getting trips or bonuses or commissions from the insurance companies I’d be an enthusiastic fan for life. I didn’t know that it even existed!

    • LSM Insurance
      October 24, 2013 at 4:25 pm

      Hi Sandi,

      Fee based advisors do exist in Canada.

      You could pay an hourly service for the advice and try a direct carrier based on their recommendations but indirectly you are still paying – just not via commissions. The salaried people answering the phones, providing the quotes etc are all factored in to the distribution costs and the premiums.

  • Alex
    September 17, 2013 at 4:27 pm

    Do life insurance agents make an hourly wage or commissions?

    • LSM Insurance
      September 17, 2013 at 5:23 pm

      There are fee based advisors but most work on commissions. Thanks

  • Jordan Brown
    September 6, 2013 at 2:29 pm

    Anyone who has sold insurance knows that the above can be true. After smashing records, and also my face against this reality, I have found that there are some companies where the culture is geared towards rescuing agents like myself from the gloomy reality that is life insurance sales.
    My company spends time ensuring morale and doing action plans that teach customer appreciation during and after the sale thereby encouraging no coercion in the presentation phase. There is also a very strong compensation plan based on traditional advance / trails / renewals… To cap this off, there is still plenty to earn and places to make it do exist. A happy agent makes a happy client and those two together get the agent PAID!! Interested in getting rescued, feel free to reach out to me and I will get you a connection in your local US area. ?

    • LSM Insurance
      September 6, 2013 at 2:33 pm

      Hi Jordan, I agree there is lots of opportunity for Brokers with a plan, support system and strong desire to succeed.?

  • Prav
    September 6, 2013 at 2:28 pm

    Life insurance is always sold n never purchased . . Commission is a long term concept …. it depends upon the sort of work you have done with the customers … ?

    • LSM Insurance
      September 6, 2013 at 2:34 pm

      Companies like BMO Insurance and Manulife Financial are trying to prove you wrong they are aggressive trying to see their plans direct bypassing the broker?

  • JL
    September 6, 2013 at 2:27 pm

    Young people don’t sell insurance because most companies promote sales over doing what’s right for the consumer. In other words you have to be a snake to sell life insurance! Sell whole life, you don’t sleep. Sell Term, you don’t eat.?

    • LSM Insurance
      September 6, 2013 at 2:34 pm

      Thanks for your thoughts. But I think both products have their place. Permanent Insurance is needed to cover final expenses and other Permanent Insurance needs.?

  • Jannah F
    August 27, 2013 at 9:48 pm

    Great pieces of information. I am glad to read this article and learn these things about life insurance. I would love to get a life insurance for me and my husband.

    • LSM Insurance
      August 28, 2013 at 5:46 am

      Thanks Jannah. We are happy to help out. You can contact us by email at or 1-866-899-4849.

  • Lyndsay with LOGiQ3
    August 26, 2013 at 2:27 pm

    The last generation of people buying life insurance were dealing with an information gap. With the internet, the knowledge gaps brokers in a number of sectors relied on are disappearing, and direct sales are becoming easier for consumers to navigate.

    If direct sale is the life insurance distribution method that has the lowest cost, it’s where consumers will go thanks to the ease with which policies can be researched. This does not bode well of commission based insurance sales, that is for sure.

    • LSM Insurance
      August 26, 2013 at 2:45 pm

      Thanks for the note. I think more complex products like Whole Life, Universal Life and concepts like Estate Planning, Buy Sell Agreements funding by Insurance are still going to be serviced by brokers rather than direct channels.

  • Jason
    August 21, 2013 at 1:35 pm

    Life Insurance commission will be gone within 5 years and agents have themselves to blame.

    • LSM Insurance
      August 21, 2013 at 1:43 pm

      Hi Jason, I agree there are a few bad apples in the industry. In fact the Insurance and Investment Journal just did an article in the August 2013 issue how insurers and MGAs are working together to push out bad apples from the industry.

      I disagree I think insurance commission will remain in the life industry but likely in a modified form.