#139 | Asset-Based Compensation

PennMutual’s new 2017 CSO-compliant Versatile Choice Whole Life is, in a lot of ways, not so different from its predecessor product. One thing that has changed, though, is compensation. PennMutual made a few subtle tweaks to how certain rider premium gets counted as commissionable premium, but the biggest change is that PennMutual added an asset-based compensation option of 0.1% annually. It’s a very small move in the direction of levelized compensation and it’s hardly the first time a carrier has tried something like this. I helped to design and roll out Premier Accumulator Universal Life (PAUL) at my former employer, MetLife, which had a small upfront commission but a substantial asset-based trail of up to 0.85% annually. Prior to launching PAUL, I thought that a product built around asset-based commissions would be structurally superior to heaped commission options and would command a sizeable share of the market. I no longer think that’s the case. Here’s why:

  1. Asset-based commission doesn’t mean reduced commission. Over time, a 1% asset-based compensation trail on an accumulation product pays significantly more compensation than heaped commission. All else being equal, a heaped commission product will illustrate better than a product with a market-rate (0.75-1.25%) asset-based trail.
  2. There is no “right” compensation payout for asset-based compensation. Some advisors charge 0.75%. Some charge 1.25%. Some charge tiered rates. Setting a single compensation level across the entire product ensures that every advisor will have a problem with it because it doesn’t fit the rest of their book.
  3. If you peel back the layers on most of the “competitive” Indexed UL and even Whole Life policies these days, their illustrated performance is driven by some degree of lapse-supported pricing. Consequently, commission structures that boost persistency may actually harm illustrated performance.
  4. Ohio National’s move to cut trail commissions undermines the trust required for advisors to trade up-front compensation for long-term rewards. I still think that selecting asset-based compensation is a smart move for advisors who are actually interested in building a business rather than just closing deals, but with the caveat that there’s more risk to the trade than might appear on the surface if the insurer is the paymaster.

The alternative, in my mind, is not to stick with heaped compensation. That too is a broken model. It pays entirely for sales and not at all for service, which is why our industry is constantly engulfed by unsustainable sales fads. Agents who do the right thing in the life insurance business often do it in spite of their incentives rather than because of them. That’s not the way forward.

Instead, life insurance should follow the lead of the annuity business. The bulk of annuity sales are on heaped commission products, but increasingly companies are offering no-compensation (“fee-only”) products. The historical complaint with those products is that advisors can’t pull the fee directly from the product because it will cause a taxable event or reduce basis, so the alternative is to undergo the hassle and complexity of double-charging another account to make up the difference. That’s not necessarily a valid complaint anymore. Before the Trump tax changes, investment advisory fees were tax deductible but they’re not anymore*. This potentially puts traditional AUM fees on more level footing with pulling a fee directly from an insurance contract in that both are taxable.

Despite what critics of our industry say, compensation is not the problem in life insurance. It’s probably 4th on the list of things that have a major impact on pricing for life insurance. Removing commission will have some very clear benefits in the form of eliminating surrender charges and most fixed charges, but long-term value in a life insurance product has more to do with other pricing decisions. Giving customers and advisors the choice of a no-commission or a heaped commission product is good business. The tradeoffs will be clear and there will be reasons to choose one over the other. And, more importantly, it will give us a chance to credibly position our products with financial advisors who would otherwise talk about term insurance and nothing else. That’s the only way we’re going to significantly grow our industry.

*I’m obviously not an investment tax expert, but Michael Kitces is. Check out his article on this issue here.

If you want to sell a fee-only life insurance product today, your only real options are TIAA Intelligent VUL and UL. They are fantastic products and the ones that I most often recommend to my personal clients when they’re looking for a simple, straightforward permanent life insurance product.