Academic journal article Financial Services Review

The Effect of Commission versus Non-Commission Benefits on Customer Value: The Case of Life Insurance Policy Performance

Academic journal article Financial Services Review

The Effect of Commission versus Non-Commission Benefits on Customer Value: The Case of Life Insurance Policy Performance

Article excerpt


In selling life insurance, some degree of negotiation of commission between sales person and consumer takes place in the form mixing permanent with term insurance in one policy, the term coverage carrying no commission to the agent, allowing the agent to trade off compensation in favor of enhanced cash value performance. Looking only at cash-on-cash return-premium contributions versus cash surrender value-this article finds that this form of commission negotiation does enhance client value in life insurance to varying degrees, but not in a predictable, consistent or statistically significant fashion. © 2007 Academy of Financial Services. All rights reserved.

JEL classification: G220.

Keywords: Financial planning; Sales commission; Life insurance

1. Introduction

In financial services, sales commissions are earned by stockbrokers, real estate agents, and insurance agents, among other categories of salespeople. Provision is made in all of these examples for some degree of negotiation of commissions between the vendor's representative (agent or broker) and the consumer (client). As an example, commission agreements in real estate sales are susceptible to negotiation between seller and agent (Goldberg, 1987; Zeigler, 1985; Sichelman, 1984). It has been debated as to how much of a sales commission is absorbed, indirectly, by the buyer, in terms of the eventual sales price (Kamath & Yantek, 1982), and so it is analogous to the study herein that there may not be a full reflection in consumer value for any degree of change in sales commission amount or percentage. Therefore, the issue under study is, "what effect does decreasing agent commission have on client net worth"? This research carves out life insurance as a distinct object for study witiiin financial services, while recognizing the potential relationship to other financial products and services (Black, Ciccotello & Skipper, 2002).

Commissions paid to agents for the sale of life insurance products to consumers comprise a large percentage of the first year premium that consumers pay for these products. As the marketplace for financial assets becomes ever more information-perfect, a marketplace pressure to allow agents and their clients to negotiate commissions has developed. This pressure has emerged despite the regulatory environment at state insurance departments discouraging the "rebating" of commissions to consumers and the concerns some insurance carriers have over the discrimination between two similarly situated clients who get different values from their policies based solely on negotiated commissions. Despite these concerns, this research studies whether there is a valuable negotiating tool in the agent commission area from products that allow the mixing of a non-commissionable term rider with a fully commissionable base coverage in a single, permanent life insurance policy. This study examines the dynamic between agent commission and policy performance primarily from the agent's point of view, in that the agent is the party generally making the decision to reduce compensation for policy performance. The agent holds that decision making power because of the informational inefficiency (albeit declining inefficiency) remaining in the life insurance marketplace-through which the agent possesses superior information about life insurance policies available, their features, and their usage in financial planning strategiessuch as retirement planning. The basic life insurance pricing model is used to test the extent to which the lowering of commissions has any predictable effect on policy cash value performance over long durations; predictable effect being measured by a constant coefficient of change in cash value given a degree of commission change.

The pace of product development in life insurance occurs at a hectic speed, given the combination of competitive pressures, the growing access to information by the consumer, and die maturing of the industry that has lead to the consolidation of insurance firms. …

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