Agents commission in Insurance Policies ?

by Manish Chauhan 173 comments

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In this article we will see the commission structure of Insurance Policies . We will look at Endowment/Moneyback/ULIP plans and how much commission an agent earns per year out of those policies , We looked at Mutual funds commission earlier and now lets see how much commission an agent earns from Insurance policies. As per Insurance Act, 1938, The insurance companies are allowed to pay a maximum commission of 40 per cent of the first years premium, 7.5 per cent of the second years premium and 5 per cent from there on. The commission paid is limited to 2 per cent in case of single premium policies. In case of pension plans, the commission is limited to 7.5 per cent of the first years premium and 2 per cent there on. Currently most of the policies are very much paying these kind of commissions . Let us quickly look some of the facts on Life Insurance .

Average sum assured of the insured Indian is around Rs 90,000 1 trillion worth of policies lapsed in 2008-09 , this is mostly because investors have discarded their old policies to buy new ones , thanks to agents who tell people about another hot plan in market. Another reason is that investors buy policies which have higher premium than what they can afford in reality and later feel that its time to stop it .

India Insurance penetration is around 7.5% of global numbers . i.e: 0.16% of the GDP, which is , against a global average of 2.14 As per IRDA report 2008-09 , Insurance Industry had 29.37 lakh agents by the end of Mar 2009 , out of which 13 lakh agents were added during 2008-09 . Note : You might also be interested in understanding How commissions in Mutual Funds is calculated . Life Insurance Commission Example

Policy Type
Endowment / Term Plans Endowment / Term Plans Endowment / Term Plans Endowment / Term Plans

Premium Paying Term

15+ yrs 10-14 yrs 5-9 yrs Single Premium

Upfront Commission (1st Year)

25% 35% * 20% 28% * 14% 2%

Trail Trail Commission Commission (2nd & 3rd yr) (from 4th yr)
7.5% 7.5% 5% 0% 5% 5% 5% 0%

Money Back ULIPs ULIPs

15+ yrs Regular Premium Single premium

15% 21% * 20 40% 2%

10% 2% 0%

5% 2% 0%

Note : Some of the numbers are in range, which means the commission can lie between that range . Mostly its minimum commission + Bonus if any

Example

Policy Type : Endowment Policy Premium Paying Term : 20 Yrs Premium/Year : Rs 1 Lacs Agents Commission

Year
1st Year 2nd Year 4-20th Year Total

Commission Amount
Rs 35,000 Rs 15,000 Rs 85,000 Rs 1.35 Lacs

Method
1 X 35% 2 X 7.5% 17 X 5% 6.75%

Q: So are you imaging which is more costly ? Mutual funds or Insurance Policies ? Ans: Its Mutual Funds (Read More) , Read subramoneys article on this topic.

How to use this information ? Agents have to make sure that they follow-up with clients and track the premium payment, this leads to overheads and regular feedback from agents side , apart from that there are operational expenses incurred by agents , so we should not forget those points . As a customer , you should be knowing how much an agent is making out of you , this should form the basis of the quality service for you . An agent should help you understand your Insurance requirement and provide you the best solution , He should assist you in buying the Policy and over the years he should update you/ help you with all the changes . Hot discussion topic As per a govt-appointed committee , Insurance commissions should totally be removed by 2011 . Immediately the upfront commissions embedded in the premium paid (to agents by insurance companies) be cut to no more than 15 per cent of the premium. This should fall to 7 per cent in 2010 and become nil by April 2011, said the consultation paper prepared by Committee on Investor Awareness and Protection. (Link) .