What Your Life Insurance Broker May Not Be Telling You

By Chantal Marr

Special to the Financial Independence Hub

Before you make an appointment with a life insurance broker you may want to educate yourself about how the system works, particularly with regard to the commissions brokers can get. Although extra incentives and bonuses for insurance brokers are getting talked about more in Canada, there is a lot the general public still doesn’t know. You may be interested in finding out exactly what your life insurance broker may not be telling you.

Most Canadians aren’t even aware of insurance kickbacks for brokers; and if they are, they don’t fully understand what they are, or where and when they take place.

The reason for this is because life insurance companies don’t advertise it, and neither do the brokers themselves. In fact, you’ll see that it could be said that the brokers appear to be more in control of the situation than the actual insurance companies.

Bonuses and Incentives for Life Insurance Brokers

The reason for giving kickbacks to life insurance brokers is that the insurance companies give them these extras so they will only promote their policies to their clients. So most brokers end up only offering consumers policies from a couple of insurance companies, not a selection.

Which of course, doesn’t benefit consumers – who in essence are helping to pay for these extra benefits.

Examples of Incentives for Brokers

A few years ago, the Globe and Mail investigated and reported on just how big giving broker’s lucrative kickbacks in Canada is; and how the practice is, for the most part, unregulated.

Three Main Extra Compensations That Your Life Insurance Broker may not tell you About

• Upfront commissions at the time of the sale
• Back-end commissions – known as ‘bonuses or “contingent” commissions’
• Perks, such as trips. In the article the Globe points out how some insurance companies set aside between $8,000 to $12,000 per broker for trips disguised as educational seminars; and to make sure brokers are happy, a guest is included (which doubles the cost).

Below are some other interesting facts it uncovered:

• Canadians pay about $15-billion in life insurance premiums each year – last year about 757,200 individual life insurance policies were sold, averaging $271,600 each.
• Billions of dollars in commissions flow every year from these sales.
• Canadian-based life insurers paid $7.2-billion to agents worldwide in 2009; and a significant proportion of that money was paid to agents in Canada.
• As much as 70 per cent of all life insurance policies now sold in Canada are handled by independent brokers who are compensated primarily through commissions and perks.
• Life insurance agents accumulate points as they sell policies for a particular firm, similar to getting points with a credit card company.
• Brokers also can get paid extra for bringing in an insurer’s favourite kind of customers – the kind who stay, or who don’t make claims.

Deception and Problems

Although standard disclosure letters when life insurance policies are purchased say that “From time to time, some companies may offer other types of compensation such as travel incentives or education opportunities.” It is obvious that this statement greatly minimizes what the broker’s actually receive – which could be considered as deceptive to consumers.

What Your Life Insurance Broker may not Tell you – You lose

It’s the consumer who loses in this scenario, because they may not be offered the best life insurance policy for their situation. But rather, the insurance company that gives the broker the most lucrative kickback.

The Brokers Seem to be in Control of the Situation

You would think that the large and powerful insurance companies have the upper hand, but according to a number of ‘high ranking insurance executives interviewed by the Globe,’ the brokers do.

If insurance companies won’t give them what they want, they won’t offer their policies – they will offer their competitor’s that pay the best with the most perks.

Why Kickbacks are Basically Unregulated

In the article, the Globe says according to discussions with people in the industry, brokers have convinced regulators that Canadian consumers aren’t able to ‘grasp complicated financial matters’ so they should not have to give them details about how they’re compensated.

This practice of kickbacks doesn’t just exist for life insurance brokers, it also happens with other types of insurance and in other industries such as financial investments. However, it is more prevalent with life insurance than other types of insurance, because life insurance is harder to sell.

A lot of people do not see the need to buy life insurance, or don’t want to pay for it because it’s viewed as a luxury – not a necessity – such as automobile, or home insurance.

Mutual fund trailer fees

A more recent investigation by the Globe and Mail looked into brokers in another multi-billion dollar industry – investments; and more specifically mutual funds. In Canada, mutual funds are still the most common kind of investment.

Although the kickbacks for these brokers (also known as advisers) is more complicated and rely on many variables, they mainly get paid commissions. And just as with insurance, the amount that is actually paid to them by investors as fees is not common knowledge, and can be quite lucrative.

Hopefully, you’re now more aware of how the system works with brokers. Although you should not write off every broker as being dishonest, ask questions about how and what they’re paid. Perhaps it’s not really an issue that they get trips and such, but it’s not right at if it’s comes at the expense of the wellbeing of consumers.

If you want to buy life insurance, research and educate yourself by reading about different policies offered by various insurance companies. The more information you can arm yourself with the less you have to worry about what your life insurance broker may not be telling you.

Chantal Marr is President of LSM Insurance, where she is in charge of product development. She has a B.A. from Laval University and Bachelor of Education from the University of Western Ontario. Chantal is a member of the Independent Financial Brokers of Canada, which gives her the flexibility to deal with all major insurance companies. She  is fluent in both English and French.

For more info on Chantal and others on the LSM Insurance team, click here.