Ever hear of an insurance agent offering to give up some of his commission in order to offer you his/her services at a discount? No? It never happens. There is a reason why you never hear an insurance agent offer a discount or take less of a commission on their sales then they would otherwise get. They would lose their license if they did that. In 48 states, all but California and Florida, offering anything of value in return for purchasing an insurance policy (e.g. rebating commissions) is illegal. It is the fastest way to lose your license and could even have criminal penalties or fines for the agent depending on the state laws. Even in California and Florida where it is legal, there is case law against it which could be problematic and if an agents carrier got wind that an agent was doing this they would probably drop the agent and not allow them to sell their products any longer.
So why is this? Why shouldn’t an agent be allowed to rebate if they want to? Other businesses do this all the time. We often see offers in the mail or when shopping online that comes with a rebate. You buy an item and a mail in rebate is being offered after purchase. It is a discount after the fact. You buy first, then a discount can be claimed. Nothing nefarious about this arrangement. It is still the buyers choice to purchase or not right? So what’s the problem here? As far as I am concerned there is none, but my competitors feel differently.
The issue is competition. The whole licensing scheme forbidding commission rebating is nothing more then a government enforced protection scheme to shield agents against competition from each other. What this protectionism has done is create a situation where there is no price competition between agents at all. None, zero, zip, nada. They are not allowed to take less commission by giving it to the client even if they wanted to. This of course has the effect of raising the prices for the customer who must pay the full commission of a given product no matter who sells it to them. Who does it benefit? It benefits insurance agents, who do not have to worry about their prices or competing with each other on price because to offer a discount would be to break the law and be out of a job. This creates a classic government enforced cartel situation that is designed for the purpose of managing competition. This is not free enterprise capitalism, this is corporatism plain and simple.
The ultimate and best solution would be to do away with this kind of government enforced cartel system. Allow agents to discount or not discount as they please. After all if it is their money, they should be allowed to rebate it back to the client if they want to. That is called freedom, liberty. I would advocate for this position if you believe in liberty and doing what is best for the client. However that is not the situation we face today, so what can we do now?
There is a legal solution
Let me be perfectly clear here, while I personally disagree with these rules, I absolutely abide by them 100%. Not that I have much choice given that the alternative is to lose my license or my contracts with the insurers. I work in California and while technically legal here if my carrier found out that I had rebated my commission I would have violated my contract with them and the contract would be voided and I would have an insurance agency with no insurance to sell. Essentially I would be out of business while technically doing nothing illegal. That is not worth the risks and I just refuse to do it. My entire livelihood could be put at risk. So what is the solution?
Minimize the commission paid in the first place.
Sounds simple right? I can’t rebate my clients for buying a policy, but what I can do, and should do, is to design policies for my clients that minimize my commissions and maximize the cash value of their plans. This can be done with the proper policy design and essentially has the same effect as a discount. It results in less commission for the agent but more cash value for the client earlier in their policy. This is accomplished through the use of the Paid-Up Additions rider on a whole life policy. The effect is the same as a discount or rebate but I don’t risk losing my business over it. In the long run if you asked your insurance agent to rebate their commission to you that would create a situation where your agent may not be in business later. This is ultimately not a good thing for the client either because it’s good to have a real person to support you when you have question, problems or concerns. That is what your agent is there for. You want them to be around to do those things for you.
With this approach there is no risk that I might not be around for the long haul to help my clients with their policies when they need support, and they get a highly performing policy that has the same effect as a discount without violating the rules.
The advantage for me of course is that I can offer my clients more value then most insurance agents since most are either unaware or unwilling to deploy this approach. The unwilling ones don’t want to take a haircut and so design their policies with the opposite intention in mind, to maximize their commissions. This directly results in whole life policies that often don’t have any cash value until the 2nd or 3rd year. It is not only possible, but very likely, for you to have cash value in your whole life insurance policy from the very first year, and not just a little but a vast majority of your contributions worth. This is the right thing to do for the client and that is the best reason for doing it.