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Agents' commissions in life insurance- Did you know?

Kripananda Chidambaram
Fintotal.com


In life insurance policies your agents' commission hides under the banner Premium Allocation Charge. This is a recurring charge, which means this is deducted on every premium you pay. Usually charges are highest in the first, second and third years and are constant for the remaining term.


How high would you expect agent's commission could be in the first year (get prepared to be shocked)? Ulips can have up to 40% as agent's commission in the first year. With non-linked traditional policies it is only slightly lower- can be up to 35% of first year premium.


With IRDA's recent guidelines for non-linked policies agent's commission on these depends on the length of term. So don't be surprised if your agent pushes endowment policies with term exceeding 12 years than policies with term lesser than that from now on. The table below will make the picture clearer.


























































Premium paying


Maximum commission as % of premium


Term


Year 1


Year 2 & 3


Subsequent Years


5


15


7.5/5*


5


6


18


7.5/5*


5


7


21


7.5/5*


5


8


24


7.5/5*


5


9


27


7.5/5*


5


10


30


7.5/5*


5


11


33/30*


7.5/5*


5


12 or more years


33/30*


7.5/5*


5


 


 


 


 


 


 


 


 


 


 


 


 


 


* For brokers the maximum commission is 30% in the first for term of 10 years or more and 5% in the subsequent years. For other agents except brokers the maximum first year commission is 40% for term of 12 years or more.


Effectively these commissions reflect how much of your premium goes in the fund for earning returns. Suppose you pay an annual premium of Rs 10,000 on a 15 year endowment policy. In the first year up to Rs 4,000 would get deducted as agent's commission so after all the other charges (did you forget policy administration charge, fund management charge, mortality charge, etc?!) you can expect about Rs 3,000 left to go to your fund in the first year.


Is there a smarter way of avoiding agency costs? Yes, there is. You can buy pure term policies online directly from the insurer and pay zero commission. You get better insurance cover for lower premium. Similarly for the investment part you can invest in mutual funds through the direct mode. Insurance any way is not a great investment tool.


The author is the Director of Fintotal Insights and Resources.

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