The Conundrum By Trevor & Heather Garbers
For this article we would like to focus on the concept of heaped commissions – are they necessary (or even ethical) in the industry today? As with any hot topic, it is important to think about the stakeholders on both sides before making a judgement. To bring us to a common understanding, Heaped Commissions are when there is a high 1st year commission, with a lower flat renewal – for instance a 60% commission in year 1, with a 10% renewal available thereafter. This type of structure is common with Accident, Hospital Indemnity, Critical Illness, and Permanent Life Insurance; and is compared to the level 10%, 15%, 20% commission commonly paid for other employee benefits such as dental, vision, and term life insurance. Heaped commissions were created to pay for the cost of marketing and enrolling individual policies on a payroll deducted basis – the establishment of worksite benefits. For years, heaped commissions were really the only option and it was common in our business for cases to move carrier to carrier every (2) years as the sales representative sought to replicate high 60-75% (or higher) commissions year after year, or BOR’s changed hands. At this time, “worksite” products were typically on an individual chassis, which often had commissions that were vested for the life of the policy, and would remain with the writing agent even after a BOR. From a purely revenue standpoint, how long does it take to earn the same or more on a level commission basis, as compared to heaped commissions?
Heaped Commissions
Level Commissions
Year 1: $100,000 AP x 60% = $60,000 Revenue
Year 1: $100,000 AP x 20% = $20,000 Revenue
Year 2: $100,000 x 10% = $10,000 (+$60,000) = $70,000
Year 2: $100,000 x 20% = $20,000 (+$20,000) = $40,000
Year 3: $100,000 x 10% = $10,000 (+$70,000) = $80,000
Year 3: $100,000 x 20% = $20,000 (+$40,000) = $60,000
Year 4: $100,000 x 10% = $10,000 (+$80,000) = $90,000
Year 4: $100,000 x 20% = $20,000 (+$60,000) = $80,000
Year 5: $100,000 x 10% = $10,000 (+$90,000) = $100,000 Total Accrued Revenue
Year 5: $100,000 x 20% = $20,000 (+$80,000) = $100,000 Total Accrued Revenue
We’ll use the examples of 20% level commission and 60%/10% heaped commission, with $100,000 in annualized sold premium to illustrate this for you. Note: This example does simplify the issue quite a bit as it doesn’t take into account if the group is case level or policyholder heaped, or if annual premium is growing year after year with new hires or increased participation. We are creating our projection based on premium written in year 1 only. In this example, we would need to keep the coverage with the same carrier for at least 5 years for the level commission payout to equal what you would have earned in the same amount of time on a heaped commission schedule.