Tan Kin Lian's Blog: Selling life insurance

Thursday, April 15, 2010

Selling life insurance

There were some questions asked about how a life insurance agent can make a living, if the agent only sell term insurance to earn a low rate of commission.

Here is my answer. Similar to a general insurance agent or a stockbroker or a doctor. Earn a remuneration that is based on the value of the service that is given to the client, and not a high rate of commission that exploits the ignorance of the client.

A general insurance agent earns a commission of 15% on the premium that is paid to cover the risk. In Europe, the commission for motor insurance has decreased to 5% of premium, as the premium is high and the work involved is routine. The insurance agent can still make a living.

A stockbroker charges a commission of 0.3% of the invested sum, share between the firm and the remisier. They do not have to take away 150% of the annual amount of savings.

The doctor earns a fee based on the time spent on consultation and a markup on the medication. Due to competition, the fee is reduced to a rate that the ordinary people can afford. The doctor has to pay the rental of the clinic and the staff to man the reception.

Life insurance sales can also be made using the above approaches. Many people need a large amount of term insurance, say $500,000. They also need disability insurance and medical expense insurance. They can afford to spend up to 2% of their earnings (say $500 to $800 a year) to cover these personal risks. A 15% commision on this premium can be quite attractive.

The life insurance companies have to change its mode of marketing. Most importantly, they have to remember their responsibility to provide good value products and take care of the financial well-being of their clients.

Tan Kin Lian

15 comments:

Roy said...: Mr Tan,

I agree that term insurance offers the best value to customers. However, despite the various education efforts, the masses usually would still prefer life insurance with cash value. The main reason for this is because people generally feel more secure when they get back some returns on their premiums (on life insurance) but fail to realise the opportunity cost (effect of deduction) they are foregoing when they pay the additional premiums.; April 15, 2010 8:57 AM
Anonymous said...: They have misunderstood .The products with cash value are fraught with a lot of dangers and which are normally suppressed.
It is the silliest way to save money becuase there is no saving but loss.
Of course these products can be still sold because there are still many clueless consumers and many unethical insurance agents.; April 15, 2010 9:15 AM
CreateWealth8888 said...: Broker survives on repeated share transactions from the same client but not for insurance agent selling term insurance who is unlikely to get repeated biz from the same client.; April 15, 2010 9:17 AM
Vincent Sear said...: To: CreateWealth8888

GI brokers who serviced clients well are practically guaranteed of renewal commission every year. (Contrast that to LI agents who gets upfront overloaded commission for 1st year and a few more years.)

There's no incentive (or conflict of interest) in twisting (the practice of persuading clients to change policies) unless it's really a better new policy.

There's also no disincentive to slacken client servicing after a few years when commission ceased.

In the LI commission model, the agent is constantly pressured every year to replace ceased commission income. In the GI commission model, the agent is constantly accumulating more renewal commission income as he accumulate more clients (less natural attrition of course).

What I mean by natural attrition is that, some clients will pass away (no more personal policy renewals), some clients may sell their cars (no more motor policy renewals), some clients may switch companies or brokers (natural fact of life in market competition).; April 15, 2010 1:06 PM
Anonymous said...: selling insurance is no difference from conjob; April 15, 2010 3:50 PM
Anonymous said...: $800 per year is small change.

It is not even $100 a month.

15% of $100 a month is $15 a month.

Assuming the agent goes to meet the client twice, once to find out his needs and once to sign papers, this means that $15 has to cover the approximate 1-2 hour worth of meetings, including the 2-4 hour of travel time as well as bus/MRT fare or petrol.

This is not realistic.; April 15, 2010 9:09 PM
Anonymous said...: Haiz... that's why I say those who just focus on products and counting commissions cannot be financial planner. If you don't understand, just continue to do your prospecting, cold-calling, door-to-door canvassing, and push wholelife, endowment and regular ILPs.

Being a financial planner involves mindset change to provide professional services, not to sell products. A TRUE financial planner may not even sell any insurance or investment at all. Any insurance or investment product is just a tool, and whether a tool is appropriate depends on doing a proper financial analysis & planning first. If the FP determines that the right tool is not something he can sell or do, he will advise the client on options on how to get it, and usually the FP will help to coordinate.

It's not even about having a GI yearly renewable commission structure. Most agents who earn a living totally in GI are doing in volume e.g. group life & health for companies, tie-up with car companies and offer profit-sharing for car insurance, etc. They cannot afford to spend time with financial planning -- it has to be bulk service.
Contrast with customised individual financial planning. What happens if group term is the right tool for client? There is ZERO commission for group term. Do you recommend it in your financial plan to the client?

FP's main job is to come up with a comprehensive PLAN and to implement it, in order to meet the financial needs and objectives of clients. Comprehensive planning involves 20-30 hours of fact finding, info gathering, needs & goals analysis, structuring a plan to meet the various needs & goals, and recommending the tools & techniques to implement this plan. If the tool is better obtained elsewhere, e.g. ETF, or doing a Will, the FP will guide the client to the proper providers. The FP will not simply push products he can sell e.g. regular ILPs.

The financial plan is also something that requires regular review, and the FP will normally perform analysis to determine if the plan is on track every 6 months or at least annually. If the FP is also acting as investment advisor then probably will be quarterly review.

Charges will be hourly fee-based and mutually agreed. Retainer fees or wrap fees if ongoing guidance and reviews are required. For managing investments, usually a wrap fee of 0.2% to 0.5% of the AUM is charged annually.

The BRUTAL TRUTH? For singapore market size, probably can only support at most 15% of the current number of agents, consultants, RMs to become fully competent and ethical FPs.; April 16, 2010 1:35 AM
Anonymous said...: Only 5000 qualified financial planners are needed.By qualified means only those with tertiary financial planning qualification.
MAS should weed out the salesmen and women especially the conmen disguised as senior or executive financial consultants. They might have sold the most policies or qualified for mdrt , or cot but they did the most damage to the financial life of consumers. Don't believe? just examine the cases they sold. MAS must audit the cases sold by these salesmen agents. Don't ask the company , they will cover up because their sales made them #1.MAS must do it and give surprise check from time to time. This will slowly weed(weeds are toxic) them out .; April 16, 2010 9:31 PM
Anonymous said...: Vincent Sear is right. There is a difference between a GI agent and a Life insurance agent.

Secondly, at a commission rate of 15% on $500 or $800 is only $75 or $120 per year or $6.25 or $10 per month. This amount barely cover his daily needs.

To earn $3,000 a month, the life agent has to close 300 cases a month in a best case scenario or 10new cases a day. Anything less, the agent will take only $2,000 per month and not forgetting there is no CPF whatsoever.

If this agent works hard 365 days a year, he would have 3650 new clients, how is he going to service them and still take new clients the second year?

If you have 1,500 of such agents, there will be no more clients for the second year as Singapore only has about $4.4 million.

Is your model realistic?; April 16, 2010 11:54 PM
Anonymous said...: Anon April 16, 2010 11:54 PM.
fee is the best. fee is paid according to agreement and not hidden like the commission which is never told to the customers. Disclosure is a must as required by MAS FAA yet no insurance salesman ever discloses it.
Fee is transparent. No agreement of the fee for the advisory work nothing happens. The customers can decide, to calculate, to get another opinion but not with commission. But with insurance agents invariably a product with high commission is pitched and peddled whether the product is good or not for the customer.
With the fee model all the products will have no load or commission and the customers can buy directly from the manufacturers
or the distributing shops with a prescription chit or report like buying medicine from a pharmacy with a prescription.
Only qualified 'financial doctor' with the right and tertiary qualification will be in practice. Surely you won't see a doctor with a plumbing certificate, right? or be operated by a butcher?
Insurance agents are the 'butchers'
of the industry. They have no inkling of life insurance let alone personal finance or investing. They only can peddle and traffic in harmful and toxic products with high commission without adding value to their customers' financial life instead their cleints, their policyholders are butchered and ripped off.; April 17, 2010 11:25 AM
Tan Kin Lian said...: The current method of selling life insurance requires agents to prospect for customers. This is tim econsuming, inefficient and costly.

Life insurance should be sold like general insurance and investments. The customer must come to the office to buy the product. This is how term insurance and low cost insurance can be sold at low cost, and ethically (i.e. without misleading the customer through lies).

Many insurance companies in other countries have successfully implemented the direct sales methods, and allows customers to buy directly at lower cost.

Singapore is quite backward in this respect, due to the the freedom given to the instutujtions and intermeidaries to sell bad products to customers thorugh benefit illustrations that are quite confusing.; April 17, 2010 1:45 PM
Anonymous said...: "Life insurance should be sold like general insurance and investments. The customer must come to the office to buy the product."

The problem is that people are NOT willing to spend time to go to your office to buy the product.

It works in the US because people are smarter there.

Singaporeans can only think of "Wah if i don't die i get nothing leh pay for wat".

This is one of the biggest flaws, the lack of education about insurance.

If you don't believe me find a busy spot, open a booth and try to sell insurance that way. The only people stopping by will be police officers and people laughing at you.

People go to officers to buy car insurance, etc because THEY HAVE TO. It is compuslory. Unless we make life insurance compulsory, peopel will simply not bother.; April 18, 2010 10:05 AM
Anonymous said...: Anon, April 18, 2010 10:05 AM,

Why don't these people ask why motor insurance no cash value, or medishield no return or travel insurance no refund of premium after a safe trip.
You are right that they lack knowledge and purpose of insurance.In this world there are always these 'vomit blood can die' type of people.That is why there are still insurance agents. Don't waste your blood on them.; April 19, 2010 9:43 PM
Anonymous said...: "Why don't these people ask why motor insurance no cash value, or medishield no return or travel insurance no refund of premium after a safe trip."

Motor insurance - Cheap + compulsory

Medishield - Automatic, they dont even know its taking money from medisave. Most people think medishield is compulsory like CPF contribution.

Travel insurance - Only scared lose people go buy really...or kena conneced by hearing horror stories from travel agencies.; April 20, 2010 8:16 AM
Unknown said...: Nice posting above here.I am so glad since i found this marvelous web post above here.Life insurance should be sold like general insurance and investments. The customer must come to the office to buy the product.

Jones act insurance; March 12, 2013 7:44 PM