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Page 2: Hidden rivers of incentive: How agent commissions affect your insurance shopping. Pressure to sell life insurance can lead to conflicts of interest

"No more, 'I'm too busy.' No more, 'I have staffing trouble.' No more, 'I'll do my best.'" That's what one Farmers Insurance Co. district manager wrote in a memo to his insurance agents in early 1999. He was talking about selling life insurance.

"The reality is that life insurance salespeople will often sell people stuff they don't need," says Kenneth Robbins, a partner and health insurance broker at Kenneth S. Robbins Insurance Services in Woodland Hills, Calif. Robbins, a former MassMutual life insurance agent, says that one of the reasons life insurance agents feel compelled to "sell, sell, sell" is the commission structure. "It's feast or famine. The agent gets paid right up-front with life insurance policies, and little to nothing two or three years down the road."

Unlike home and auto insurance policies, which pay nearly the same commissions for renewed business, renewed life insurance policies don't pay agents big bucks. Typically, a whole life insurance policy will pay between 40 and 55 percent commission for the first year. After that, the agent commissions drop — in most cases — to below 7 percent annually.

The lower life insurance commissions after the first year of a policy might be due to the relatively little service that the insurance policy requires. Unlike auto or home insurance, life insurance policies don't need to be renewed and reviewed every year (or every six months).

Some view life insurance sales as the bread and butter of the insurance industry. "Life insurance is the key to everything," says Mark Kronemann, a Farmers Insurance agent based in Newbury Park, Calif. Life insurance premiums are money in the bank for insurers. They get to invest your premium dollar and potentially make lots of money, more so than with auto and homeowners premiums because the mortality rate (meaning life expectancy) of customers is fairly easy to predict. "Companies know exactly how long they'll have that life insurance premium because life-expectancy tables are so darn accurate," says Guilmette of NAPAA.

A sampling of agent life insurance commissions

Company Universal/ whole life Term life
Allstate 40 percent of first-year premium 30 percent of first-year premium
Farmers 50 percent of first-year premium 40 percent of first-year premium
State Farm 50 percent of first-year premium for Executive Protector policy 40 percent of first-year premium for 10-year term policy

Kronemann says that there's never been a strict quota to meet when selling life insurance, but the pressure to sell more of it is evident.

Farmers Insurance Co.

Farmers, for example, offers a three-day trip to its "Topper Club" members — agents who sell the most new life insurance policies over a 12-month period and whose customers have a small number of lapsed and nonrenewed life insurance policies. Kronemann himself won a trip to Scottsdale, Ariz., as a "Topper Club" member in 1995, and estimates the trip was worth about $800.

Farmers doesn't view the Topper Club or other agent incentives as a conflict of interest. "Achievement clubs like Topper provide incentives for the agent to expand their staffs and, by doing so, improve customer service and increase production," says Steve Feely, vice president of marketing at Farmers. "These clubs help agents by rewarding balanced production and emphasizing serving all of the customers' needs."

Furthermore, Feely says that Farmers has a "moral obligation" to sell insurance to its policyholders. "We'd be remiss if we didn't offer comprehensive insurance services — including life insurance," he says.

State Farm Insurance Co.

Among State Farm agents, "You're not a team player if you don't sell life insurance," says Ray Gilmore, a former State Farm agent based in California. "You don't get to go to profit meetings or underwriting meetings if you don't sell life insurance, and if you're not selling life insurance, you won't get into the Legion of Honor, which leads to all of the bonuses," he says. To gain entry into the Legion of Honor, an agent must sell 40 life insurance policies, which can in turn lead to bonuses of between $1.20 and $6 for auto, home, and health insurance policy the agent has in his or her customer ranks.

State Farm's agent-incentive program has five levels: Legion of Honor, Bronze Tablet, Silver Scroll, Golden Triangle, and Crystal Excellence. If an agent sells 40 life insurance policies, he or she will enter the Legion of Honor and receive a $1.20 bonus for all in-force auto, home, and health policies. To attain the Bronze Tablet, which pays $2.40 per in-force policy, an agent has to have made the Legion of Honor in five out of the last six years. Agents have to make the Legion of Honor for 10 out of the last 12 years or a total of 15 years to grab the Silver Scroll bonus and $3.60 per in-force policy. To receive the Golden Triangle award — $4.80 per in-force policies — an agent has to have made the Legion of Honor in 15 of the last 18 years or a total of 20 years. And finally, in order to receive the $6 per in-force policy bonus — Crystal Excellence — the agent must have earned the Legion of Honor in 20 out of the last 24 years, or 25 years total.

The Legion of Honor and sales of life insurance are paramount in determining what a State Farm agent can earn, says Dennis Farrell, a former State Farm agent in California.

"The Legion of Honor is not just a life insurance program," notes Greg Laird, executive administrative assistant in the agency department at State Farm. It rewards agents for selling ability of auto, home, health, and life insurance. However, Laird notes that life insurance is not always on the top of policyholders' list of needs, and the company has an obligation to let them know that life insurance can protect their families in the future. "We encourage and we expect our agents to meet our customers' needs," says Laird.

Erie Insurance Co.

Erie Family Insurance Co., a part of the Erie Insurance Group, tried to light the selling fire in 1999 under independent agents who sell Erie life insurance with "generous" first-year commissions ranging from 30 percent to 75 percent. In addition, "exceptional life production" (agents who rake in $10,000 worth of life insurance commissions in a calendar year) results in an additional $1,000 bonus from Erie. Each additional $5,000 in commissions in the same year will garner the agent another $500.

Karen Rugare, a spokesperson for Erie Insurance Group, says that the company compensates its agents "fairly" and that parts of the 2000 commission structure have changed from 1999. She notes there are many variables used to calculate agent commissions.

Allstate Insurance Co.

"Salespeople will work seven days a week to win a trip."

To make Allstate's "Honor Ring," an agent has to sell at least 20 life insurance policies in one year amounting to at least $10,000 worth of premiums, and keep 70 percent of those customers in his or her book of business for 48 months. Once an agent is in the Honor Ring, he or she can qualify for all-expense paid trips to New York, London, and Scotland — Allstate's reward destinations in 1999. For example, if your Allstate agent reached the Honor Ring in 1999 and sold $50,000 in life insurance premiums, he or she was off to London for the "Chairman's Conference."

"Salespeople will work seven days a week to win a trip, be announced at a sales meeting as a 'star producer,' and perhaps eat dinner at the same table as the president of the company," says John Bloomer, a former State Farm agent who spent 30 years with the company. Bloomer, who retired in June 1998, says his own office was open six days a week. Continue to page 3: Can agents serve two masters: commissions and policyholders?

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