Financial Planning for Insurance Brokers
By W. Harold Petersen, RHU, DFP & Phil Harris, CPA
Agents, Brokers, Advisors, Planners and Producers dedicate considerable time, effort and direct hard dollar expense to pursue the quest of planning for the financial security of their clients. Fundamental to financial well being of clients is the creation of an income cash flow, under any contingency, adequate to match the outgo (expense) cash flow.
Of concern are the easily recognized contingencies that affect cash flow; unemployment, business failure, getting too old to earn money, getting sick or hurt and in consideration of dependents, the aspect of death. Being rich, or at least having a passive cash flow sufficient to be used as a substitute for earned income, is the single best solution for all of these contingencies.
A financial plan is then conceived and the parts are put together to create, for the client, a plan that will bridge the chasms of diminished or disappearing cash flow. Loss of job and business failure is typically dismissed from awareness with a shrug and a comment like, “I just have to start over with a new business, or a new job and I will have to use my rainy day reserves”.
In Financial Planning, attention quickly focuses on retirement income and plans are set up to create the funds to create the retirement income cash flow. Death is certain, but it is hard for some people to accept the fact that death could happen before one fully collects their retirement income proceeds. Usually with reservation, some inadequate amount of life insurance is usually acquired. People that do admit they could get sick or hurt, refuse to believe they will ever be disabled. “I come from healthy stock and I’m a careful driver”, are cliché’s often heard by advisors from the uninformed and careless client..
THE QUESTION
Are these cliché thoughts of consumers also thoughts of producers as they think about their own mortality and morbidity and financial plans? Maybe?
REJOICE
We who are brokers have the ultimate financial planning tool. A brilliant financial plan can be created that is unlike anything outside the insurance business. Our unique and dynamic financial planning tool is our Renewal Commissions, especially those guaranteed for the life of the policy. In cash flow terms it produces the equivalent of millions of dollars of wealth, it outperforms the best of investments. It is magnificent deferred compensation and the finest of passive income.
COMPARISON OF RENEWAL COMMISSIONS TO OTHER ASSETS
A quick check with the Securities Division of the Union Bank of California indicates what assets will produce the greatest yields.
| Asset | Asset Amount | Annual Yield |
| Bank CD’s | $1,000,000 3 month period @ .75% 12 month period @ 1.20% 60 months @ 3.43% FDIC covers $100,000 per account |
$7,500 $12,000 $34,300 |
| Annuities | $1,000,000 @ 3% (subject to some taxation) | $30,000 |
| Stocks/Mutual Funds | $1,000,000 – Varies –unpredictable | ? |
| Municipal Bonds | $1,000,000 – 20 years 4.2% (tax free) | $42,000 |
| Renewal Commissions ON A Renewal Account of $1,000,000 premium in force Universal Life – Difficult to Analyze = 2% or less = $20,000 |
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| Group Insurance | $1,000,000 premium | ||
| (Commissions are calculated on the new and enhanced commission schedule of a giant, premier company) | |||
| This business is on a bubble that can | First $50,000 | 3% | =$1,500 |
| without warning burst at any time. | Next $50,000 | 2.5% | =$1,250 |
| Cancellation of Coverage, change of | Next $150,000 | 1% | =$1,500 |
| brokers, business failure, | Next $750,000 | 1/2% | =$3,750 |
| mergers/acquisition, etc. | |||
| Totals | $1,000,000 | = $8,000 | |
| Individual Disability Insurance – | $1,000,000 @ | 10% | = $100,000 |
The industry average sized annual premium on individual disability income is $2,000 -$4,000. One average sized case per week for 50 weeks out of the year can produce $100,000 of premium in force.
In ten years the in-force premium is $1,000,000. Based on a 10% renewal, a broker would have renewal income of $100,000 per year.
THE DYNAMIC
- To save $1,000,000 to create passive income requires saving $1,000 per month from after tax earnings for a period of 83 years.
- A disability account of $1,000,000 in premiums can easily be done in ten years or less.
| PREMIUMS IN FORCE | ||||||||||
| YEARS | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| 10 | 1,000,000 | |||||||||
| 9 | 900,000 | |||||||||
| 8 | 800,000 | |||||||||
| 7 | 700,000 | |||||||||
| 6 | 600,000 | |||||||||
| 5 | 500,000 | |||||||||
| 4 | 400,000 | |||||||||
| 3 | 300,000 | |||||||||
| 2 | 200,000 | |||||||||
| 1 | 100,000 | |||||||||
| RENEWAL COMMISSION |
10,000 | 20,000 | 30,000 | 40,000 | 50,000 | 60,000 | 70,000 | 80,000 | 90,000 | 100,000 |
| CAPITAL REQUIRED TO PRODUCE EQUIVILANT PASSIVE CASH FLOW COMPARED TO RENEWAL COMMISSION CASH FLOW | ||||||||||
| @ 3% | $333,334 | 666,668 | 1,000,000 | 1,333,334 | 1,666,667 | 2,000,000 | 2,333,334 | 2,666,667 | 3,000,000 | 3,333,333 |
| @ 1% | $1,000,000 | 2,000,000 | 3,000,000 | 4,000,000 | 5,000,000 | 6,000,000 | 7,000,000 | 8,000,000 | 9,000,000 | 10,000,000 |
| @ .5% | $2,000,000 | $4,000,000 | $6,000,000 | $8,000,000 | $10,000,000 | $12,000,000 | $14,000,000 | $16,000,000 | $18,000,000 | $20,000,000 |
| ITEM | Rate | Capital | Cash Flow | |||||||
| Bank CD | 1/2% | x | $20,000,000 | = | $100,000.00 | |||||
| Annuities | 3% | x | $3,333,333 | = | $100,000.00 | |||||
BROKER PERSONAL FINANCIAL PLANNING
When Is Fifteen Better Than Fifty?
The answer is “When it is the applicable first year commission rate on disability plans!” Oh, not in all cases, but experience teaches us it is true on most. For a broker payday comes, at the earliest, on the date of policy delivery, but more commonly thirty days later. The General Brokers we talk to say it is not uncommon for carriers to take three to five months to issue a non-can disability policy.
Unlike this rather common scene where underwriting delays delivery of a product for two to four months and often results in a “non-take” after all the up front work, Petersen International’s over all issue-time average is eighteen days. Our disability plans are intended to be supplemental to a non-can plan, not a substitute. The following presentation is for the purpose of illustrating that these plans may well yield as much, or more, in commissions over the life of the plan as the base coverage it supplements. For business comparisons consider these factors:
| Typical Insurer*** | Petersen International | |||||
| Average Premium per Case | $3,000 | $3,000 | ||||
| # Cases per year (submitted) | 50 | 50 | ||||
| Annual Premiums | $150,000 | $150,000 | ||||
| Rejections by Company | 8 (16%) | 1 ( 2%) | ||||
| Non-Taken Cases due to modified coverage, ratings, waivers or long delays in underwriting. | 12 (25%) | 1 (2)% | ||||
| Net Placed Cases | 30 | 48 | ||||
| Net Placed Premium (first year) | $90,000 | $144,000 | ||||
| First Year Commissions | (50%) $45,000 | (15%) $21,600 | ||||
| Renewals | Lapse Rate* | Renewal Premium | Renewal Comm. | Lapse Rate** | Renewal Premium | Renewal Comm. |
| Second Year | 20% | $72,000 | $3,600 | 3% | $139,800 | $13,980 |
| Third Year | 8% | $66,240 | $3,312 | 3% | $135,606 | $13,560 |
| Forth Year | 6% | $62,265 | $3,113 | 3% | $131,537 | $13,153 |
| Fifth Year | 4% | $59,774 | $2,988 | 3% | $127,590 | $12,759 |
| Total Renewal Commission | $13,013 | $53,452 | ||||
| Total Commission over 5 Years | $58,013 | $75,052 | ||||
THE POINT: FIFTEEN MAY EXCEED FIFTY BECAUSE OF SERVICE, DILIGENCE,
RESPONSE AND CARE OF THE CUSTOMER, AND HIGH RENEWAL COMMISSION RATES
*Litton B Lapse Rate
**Overstated as to actual experience on five year term plans.
***Experience based on PIU study of the effects of arduous underwriting processes.
GROUP INSURANCE RENEWALS ARE UNPREDICTABLE
- Cancellation by Insurer or Plan Sponsor
- Change of Broker of Record
- Change because of merger, acquisition or business failure
INDIVIDUAL DISABILITY INCOME
- Difficult to replace
- People keep it. Persistency is excellent
- No Broker of Record Letter involved
- Reliability of rates and coverage.