IUL: What you need to know about commissions

Flexibility in a life insurance policy is a great benefit for customers. It’s a big reason why the wide range of universal life products have been so popular.

However, flexibility in insurance often brings with it a more complex product, which can cause problems for both customers and agents.

Among the family of universal life products, indexed universal life is one of the sneaky confusing products I see agents struggle with. This is the first in a four-part series of articles about IULs that will remove some of the speed bumps agents face on the road to keeping flexibility-starved customers happy.

Today we start with something close to every agent’s heart - commissions.

Why are agents so confused about IUL commissions?

Many agents, especially those new to the business, are more comfortable with products that have traditional commission structures. With term and whole life products, they know how much and how long they will earn commissions as long as the customer stays current with premiums. Agents like the black and white nature of these products.

Commissions on IUL policies (and other universal products) are anything but black and white. I would describe them as many shades of gray, and open to change throughout the life of the products based on the customer’s situation and needs.

Let’s look at several factors that contribute to the confusion of IUL commissions:

1. Complexity of target premium. Agents sometimes assume they are earning commissions on total premiums for IUL sales. However, IUL commissions are calculated on target premium. A target premium for an IUL policy is the maximum allowable premium that can be fully commissionable which is defined by the insurance company. However, the client may choose to raise or lower their premium payments over time based on their specific needs. This impacts the agent’s commission.
2. Premium flexibility. IUL policies allow for flexible premiums, meaning clients can pay anything in between minimum premium and the maximum funding premium each year. This unpredictability makes it hard for agents to forecast their long-term commission income accurately.

Understanding the minimum target premium

Minimum premium is the premium amount the insurance company determines will keep the policy in force for the minimum guarantee period, which is usually 5-10 years.

Carriers typically use conservative financial assumptions to calculate target premium, including an assumed rate of return. ROR is key since a higher nonguaranteed return results in a lower premium (and vice versa). However, maintaining the target premium does not guarantee the policy will remain in force if the ROR falls short of projected returns.

If a client pays the target premium or less, the agent receives their full commission. However, if the client overfunds the policy — paying more than the target premium — the commission on any amount over the target is significantly reduced and defined as excess.

In short, target premium introduces variability into the agent’s earnings based on how the policyholder funds the policy, which may fluctuate over time.

Target premium impacts upfront and renewal commissions

While an IUL policy pays upfront commissions (based on the premiums paid in the first year) and renewal commissions (paid on premiums received after the first year), these commissions are directly tied to the combination of both target and excess premiums.

• Upfront commissions: Agents earn a percentage of the target premium as an upfront commission in Year 1. If the client pays less than the target premium in the first year, the agent’s commission will be lower. This is where flexibility in premium payments can confuse agents, as they might not receive the full expected commission if the policyholder reduces their premiums or, if the target premium is listed as one value and the client decides to only pay the minimum amount.
• Renewal commissions: Renewal commissions are paid on subsequent premiums, but again, the amount is based on the target premium, not any excess premiums paid. Agents earn a smaller percentage on these renewal payments. However, agents often struggle to predict their renewal commissions because clients can change their premium contributions over time.
• Excess commissions: Excess commissions are paid at a reduced level based on the amount of premium funded over the target level.

Clarifying IUL commissions for success

To avoid surprises, agents must both educate themselves on the intricacies of IUL commissions and pay close attention to the client’s actions. An IUL is definitely not a sell-it-and-forget-it type of product.

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Drew Gurley is a licensed life insurance expert with nearly 15 years of experience. During his career as both a licensed life insurance agent and industry executive he has helped thousands of clients with their life insurance needs through his work at Redbird Advisors and Senior Market Advisors.