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“Low Load” Life Insurance Explained

One of the most common questions I’m asked is, “Do you offer low-load insurance for fee-only financial advisors and their clients?” The answer is no. In fact, no insurance outlet offers lowload insurance products because they do not exist. In this article, I will clarify the marketing term low-load and how it affects the consumer.

The term low-load is best described as a lower commission paid to the agent/broker resulting in a lower cost for the underlying insurance policy. Insurance pricing structures are regulated and the term low-load is never used in policy language because it is misleading. The term is commonly used by brokers in marketing as a way to convince the consumer that they may be receiving a better value than they really are. In truth, often times products offered that appear to reduce the commission to the agent/broker actually provide higher overall compensation.

Life insurance policy design is the leading factor to a policy being sold as a low-load policy. The most common way to lower the commission is to blend term insurance into a permanent universal life policy. Doing this creates an annual-renewable term insurance pool where the premium is lower than permanent insurance of the same amount. Therefore, the lower the premium, the lower the commission paid to the broker. In my experience, this only results in a lower premium a fraction of the time. This is because only a small group of companies offer the ability to blend coverage and often times non-blending companies are more competitive.

A slightly more advanced method of creating the illusion of a low-load life insurance policy is through the use of specific riders that greatly reduce initial surrender charges increasing cash surrender values in the beginning years. This provides the illusion that there is a reduced commission. However, the actual commission paid to the agent/broker is greater over a long period of time. With these riders, the agent/broker receives a commission of about 14% per year for 10-years, totaling 140% of the annual premium. A policy without this rider would pay about 85% in the first year. These riders are best classified as policy flexibility riders rather than lowload policies. Many policies being sold using this strategy are to reduce the affect surrender charges have on permanent policies if the estate tax is repealed. It should be understood that most insurance companies have provisions allowing for charge free surrenders if the estate tax is repealed. Again, only a few select companies, whom are not always competitive, offer this flexibility in policy design.

There are no policy options or structuring mechanics that allow a lower commission to be paid on term life, disability or long-term care insurance policies.

Although policy design and cash surrender value riders allow commissions to be paid over a period of time reducing up front surrender charges, the term low load is a mere marketing term. I feel a proper evaluation of life insurance options for permanent insurance needs includes blending, cash value riders and traditional guaranteed products to determine the best recommendation for each client’s specific situation.