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Page 3: Hidden rivers of incentive: How agent commissions affect your insurance shopping Can agents serve two masters: commissions and policyholders?

Incentives, bonuses, and trips are all part of the agency sales strategy, says Rick Sabo, an independent agent at Gibsonia, Pa.-based Money Concepts International. But Sabo, a former MetLife agent, says there's an inherent danger when companies offer trips and bonuses in exchange for the sale of policies. "How many agents are selling the stuff because they're getting a perk or a bonus?" he asks. "Almost every company out there is trying to enhance sales with trips and other incentives. That's a conflict of interest." So, when an agent recommends a policy to you, is it motivated by your insurance needs or the promise of a nice commission?

Take LifeUSA's "Producer Perks," an incentive program that offers agents "a galaxy of prizes," including "fax machines, computers, home furnishings, jewelry, boats, cars, motor homes, the vacation of their dreams, and more!!" What else could there be? How about stock in the company? A LifeUSA agent brochure says that its agents who "create wealth ought to have a Share of the Wealth!" Agents can earn stock options and other bonuses "simply by producing business," says the LifeUSA brochure.

Officials from Allianz Life Insurance Co., the parent company for LifeUSA, did not return calls.

A small percentage of agents — 3 percent to 5 percent of all life insurance agents, according to George Krauss, president of the Magellan Group Inc., a risk-management consulting firm based in Pittsburgh — will sell folks new policies when their old ones don't need replacing, simply to get the high first-year commission again. The misleading sales practice of convincing someone to buy a new policy they don't need is called churning. But for an agent looking for a shot of big life insurance commissions, churning is an easy fix.

A veritable who's who of insurance companies have been smacked with class action lawsuits that ultimately settled for millions, sometimes billions, of dollars, because of insurance agent churning. For example, American General Life Insurance Co., John Hancock Mutual Life Insurance Co., Metropolitan Life Insurance Co., and Prudential Insurance Co. of America have paid hefty prices for churning.

"Healthy" commissions for agents and brokers

Health insurance agents, like their auto, home, and life insurance agent counterparts, can make big dollars if they work hard enough.

Kenneth Robbins, an insurance broker based in Woodland Hills, Calif., says his commissions for selling group health policies for small businesses — 120 firms that average 23 employees each — range from 3 percent to 10 percent, but most are 3 percent to 4 percent.

One "major HMO" with whom he does business pays Robbins a 6 percent commission for each group policy he sells. Premiums on that policy range from $270 for one person to $420 per month for a whole family.

He indicates that most companies offer similar health insurance commission structures.

Aetna U.S. Healthcare, for example, reportedly cut its commissions for small group health insurance policies from 5 percent to 3 percent on Jan. 1, 2000.

For large group health plans, insurers and HMOs will pay 1 percent to 2 percent commissions, says Robbins. For individual health insurance policies, insurers will shell out bigger commissions, usually 20 percent for the first year and then 10 percent for each additional year you renew.

Whether or not these life insurance companies have since implemented changes in their agency force or commission structures is unclear. The Florida Department of Insurance, for example, came down hard on MetLife in recent years for the consumer abuses their agents perpetrated, fining the company multimillions of dollars. As part of the fine, MetLife signed a consent order in which they agreed to comply fully with Florida law when it comes to selling insurance policies.

However, the order does not specify that MetLife has to restructure its agent commissions, nor does it address whether or not the company is required to educate its agents on avoiding churning and misleading sales pitches. Nina Bottcher, a spokesperson for the Florida Department of Insurance, says only that MetLife is required to take all the steps necessary to comply with state law.

Indeed, other life insurance class action settlements do not require the insurers to educate agents or restructure its life insurance commission schedule for agents. In fact, a standard part of such settlements are that the insurance company admits to no wrongdoing, although it agrees to pay hundreds of millions of dollars for its agents' alleged no-nos.

"None of the settlements in which I've been involved required the insurance companies to change their commissions or re-educate their agents," says Ron Parry, a partner at Arnzen, Parry & Wentz, a Covington, Ky.-based law firm. Parry, who has been involved in more than 10 life insurance class action settlements involving companies such as American General Life Insurance Co., John Hancock Life Insurance Co., Pacific Life Insurance Co., and Prudential Insurance Co., says that the class actions have made state regulators aware of potential abuses and the industry itself is making an effort to curb churning and misleading sales practices among its agents.

Parry cites the formation of the Insurance Marketplace Standards Association (IMSA) as the insurance industry's effort to police its own selling. The IMSA, formed in 1998 as a result of the spate of class actions filed against life insurers, is a group of 221 life insurance companies that advocates and requires ethical sales practices within its membership ranks. Parry says that the IMSA is "like the fox watching the henhouse," but "before it came along, nobody was watching the henhouse."

Sabo cautions policyholders to think about why agents try to sell you certain policies, especially captive agents. "Are you serving your best interest by buying from an agent that sells policies only from one insurer?" he asks. The motive to sell certain life insurance products — whether or not they fit your particular needs — could be driven by the quest for commissions and trips.

Sabo's Money Concepts International does not allow its agents to participate in insurance company bonus programs.

The lure of annuity sales

The commissions paid on annuities might also influence the products your agent tries to sell you. For example, fixed-annuity commissions generally range between 2 percent and 12 percent, with longer-term annuities offering larger commissions. A seven-year Lincoln Benefit Life indexed annuity will pay an agent 6 percent commission, for example, while the 10-year Lincoln Benefit equity-indexed annuity pays a 10 percent commission.

"The longer you can get the annuityholder to tie up their money, the larger the commission will be," explains Sabo. That's because the insurer has a better chance to make money over a longer period of time on the money you pay in.

There's also the lure of exotic trips for big annuity sellers. A Lincoln Benefit annuity broker or agent can get a trip for two to one of 11 European destinations — Amsterdam, Brussels, Frankfurt, Innsbruck, Lisbon, London, Luxembourg, Madrid, Munich, Vienna, or Zurich — if he or she brings in at least $85,000 in paid annuity premiums.

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