As a follow up to the post on cutting out the middle man, I thought I would write about another case of “half-truths” from insurance companies.
About 6 years ago, I was at a financial planning conference where the issue of fees and commissions was being discussed by a panel. One of the panel members was representing the LOA (Life Offices Association, now ASISA) and he stated that about 35% of the cost of new business for life insurance companies was the cost of commission that they paid to advisors. This means for every R100 of premium, R35 was (according to the official industry association) a direct result of the commission that was paid to advisors.
Being the trusting type, I therefore assumed that if you remove the commission from the quote, there should be a reduction of ±35% in the cost of the cover. So for about 6 years now, we have been providing life cover for our clients without any commission on the policies*.
The problem is that in whole time that we have been providing commission free life insurance policies (yes it can be done), we have not yet seen a reduction even close to the supposed 35% that the LOA was touting, nor have we found anyone in the industry that has been willing or able to explain the reasons for the discrepancy.
For the record and in our experience, if we remove the commission from the life cover then there is a reduction of between 12 and 27% in the cost of the cover (depending on the insurer) this is clearly far short of the supposed 35% and some insurers are obviously creaming more for themselves than others.
In practise this means that if the cost of the cover (with full commission) would have been R1000 per month, by removing the commission from the policy, the premium could be reduced to ±R750 per month). Over a 10 year period that is a saving of at least R30000 in additional premiums. Makes you think, doesn’t it?
That’s all for now!
The Financial Coach™
*we do this by charging an hourly rate for work done in providing the cover – typically this is anything from 2-4 hours depending on the type of cover involved.