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Commission of your life insurance agent is exorbitant

Welcome to the annual "insurance season". As the Financial Year 2014-15 nears its end, people scamper to make their tax-saving investment u/s 80C. And, despite poor returns and many other obvious disadvantages, insurance policy is at the top of the list of tax-saving instruments.

This is unfortunate indeed... for the policy buyer, of course...  the insurance companies and their agents make merry.

A lot has been said and written about the pathetic yields that the typical life insurance policies generate. (Read: 'You just lost Rs.4.80 lakhs!')

The primary reason for this is the huge "upfront" deduction from your premium (termed as Premium Allocation Charge), which is paid to your agent as his/her commission. Among the various investment products, insurance is at the top as far as the commission paid to its agents is concerned.

Let us, in this blog post, see what your life insurance agent typically pockets from the premiums that you pay year after year.

Non-linked insurance policies (e.g. endowment, money-back, term policies)
- 1st year : Starts from 15% of the premium for 5-year premium paying term policies and progressively goes up to 35% / 40% for policies with premium paying term of 12 years or more [See detailed chart at the end]
- 2nd and 3rd year : 7.5% of the premium
- 4th year onward : 5% of the premium

So, for example, if you buy a 15-year endowment insurance policy with a premium of Rs.1 lakh per year, your agent gets Rs.35,000 in the 1st year, Rs.7,500 each in 2nd and 3rd year and Rs.5,000 every year from the 4th to the 15th year. This works out to a total of Rs.1.10 lakhs.

Non-linked pension plans
- 1st year : 7.5% of the premium
- 2nd year onward : 5% of the premium

Unit Linked Insurance Plans (ULIPs)
There is a cap on the total charges (excluding mortality charges). For policies with term up to 10 years the maximum difference between gross and net yield should be 3%; and maximum 2.25% for policies of more than 10 years term. [Some of the new ULIPs are available at attractive charges, making them really investor-friendly].

Single premium non-linked insurance policies / pension plans
- 2% of the single premium

As compared to the above, 
a) post office agents get 0.5% for various Time Deposits, NSC and MIS schemes (there is no commission on PPF and Senior Citizen Savings Scheme)
b) real estate agents may charge you generally between 0.5% to 2%
c) stock brokers may charge you generally between 0.25% to 1%
d) nothing is deducted upfront from your mutual fund investments; the distributors get a trail commission on your investment. Your total cost in mutual funds is the annual fund management charges (from which the agents are paid the trail commission). These charges vary depending on the type and size of fund, but the maximum is capped at 3% of your investment value.

By the way, insurance agents are prohibited by law to pass on the commission, either partly or wholly, to their customers. Yet, rarely do the agents follow this rule. In fact, most of you often demand and agents often pass-back a part of their commission.

This probably is the most foolish thing to do. You don't realize but, in the long run, this dubious and unlawful practice hurts you the most.

I wish the agents' commission on life insurance policies were more reasonable and the customers allowed their agents to retain the same. This would be in the best interest of all concerned. But, I guess that is asking for utopia... and utopia doesn't exist on this planet earth.

Chart of maximum commission
  Premium Maximum 
paying term     Commission
       5 15%
       6            18%
       7            21%
       8            24%
       9            27%
     10            30%
     11            33%
12 yrs or more  35% / 40%^

(^ 35% if the insurance company is more than 10 years old and 40% if the insurance company is less than 10 years old)

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