As Earned or Advanced Commissions...Best Of Both Worlds?

[AZtinman]

I've been reading posts about taking commissions as earned versus nine month advances.

Agents taking commissions as earned are free from the worry of getting hit with charge backs. However,
their monthly income is limited by the monthly premium they write; their monthly income IS the amount
of the monthly premium they write. However, with as earned there is no probability of charge backs.
Whereas those taking advanced commissions their monthly income is nine times their monthly premium (with a 100% contract) but subject to charge backs.

However, it seems to me if you can receive nine months of advanced commission why would you NOT want to receive it? You could be earning interest on that money instead of the insurance coming earning interest or it or using it. The ONLY reason I see not to take it is so you won't have to pay it back if you get a charge back.

What if there was a way you could take the nine months advanced commission and always have it to pay if back if needed and earning interest or dividends on the money? And, you would have a death benefit for your family if you died. And a big cash value in addition.

Sounds great, right? Maybe. I don't know.

What I'd like to do is get the opinion of the experts on this forum (since I am not one) and see if they can punch holes in this idea. And, either give it a thumbs up or thumbs down.

Here's the idea.

The insurance agent takes the nine month advance on all commissions.

The insurance agent insures himself with a whole life policy with a PAUR (paid up addition rider). Mutual company. Etc, etc. In others words the agent insures himself with a "Be Your Own Banker" type insurance policy. Or buys one if he doesn't understand how to set one up. It's important it's set up correctly.

The agent chooses a monthly premium of several hundred dollars a month. Remember, your advanced commissions will be helping to make the monthly premium. Or, will be making the monthly premiums. You can take your advanced commissions, keep 1/9 of it and put 8/9 of it into the policy as monthly premium. That will be the same as taking commissions as earned. And, 8/9 of the advanced commission will be "parked" in a safe, secure, income producing whole life policy. Building cash value and protecting those you love.

Starting the second year the cash value will build very quickly. Maybe the first year. If you get a charge back, get a loan from the insurance company your're insured with using your cash value as collateral and pay your charge back. No questions asked. It will take a phone call and a couple of days to get your loan and a couple of more days to pay your charge back. The next time you get an advance commission check do the same thing but pay off the loan first.

In few years you'll be able to pay cash for a new car for the wife. Or give her your old one and you keep the new one. Or not.

Continue to do this until you retire. By the time retirement rolls around you'll have money rolling in from your renewals and a huge cash value in your whole life policy. Huge is relative!

If you have the discipline to get out and sell insurance every day you have the discipline to handle your advanced commissions using this concept.

That's the idea in a nutshell.

Now it's the experts time to give it a thumbs up or thumbs down.

DHK, on this forum, has said in one of his posts about the "be your own banker" concept, "Alright, I've studied this at length. And I'm going to give you the truth."

Great. I'd be interested in hearing the truth about this idea. Maybe we all would.

Have a great day!
tinman

 

[DHK]

Thumbs down.

The best two ways against charge-backs are:
1) Don't get them.
2) Don't stop prospecting.

Yes, it's helpful to have cash and/or credit reserves, but if you're seeing enough people, new QUALITY sales will help repay charge-backs, if and when you get them.

Work on your business & prospecting skills first. That's your best defense against unpaid charge-backs.

 

[AZtinman]

DHK,

Thanks for your reply.

That's one thumbs down.

However, in my opinion, "don't get them" is unrealistic. There are a lot of reasons people stop making their premiums. They lose their job and can't afford to pay it. They move, stop paying, and the agent has no chance to save the policy. People forget to pay the premium and it lapses. Etc, etc.

What about the overall concept?

It incorporates cash reserves, it's using advance premiums the agent isn't taking to provide build cash value, advanced premiums is providing probably hundreds of thousands of dollars of death benefit for the family, and it guards against those charge backs that, realistically, DO happen.

What's your opinion from a financial advisor's point of view?

I may be wrong, but I believe in your post I mentioned in my first post you did say the concept is good and will work, did you not?

Thanks again,
tinman

 

[adjusterjack]

Starting the second year the cash value will build very quickly. Maybe the first year.

There's the fallacy. Cash value does not build quickly. The biggest risk of a charge back is in the first year of the policy when the commission is very large and there's very little money in the policy to cover it.

 

[Newby]

DHK,

Thanks for your reply.

That's one thumbs down.

However, in my opinion, "don't get them" is unrealistic. There are a lot of reasons people stop making their premiums. They lose their job and can't afford to pay it. They move, stop paying, and the agent has no chance to save the policy. People forget to pay the premium and it lapses. Etc, etc.

What about the overall concept?

It incorporates cash reserves, it's using advance premiums the agent isn't taking to provide build cash value, advanced premiums is providing probably hundreds of thousands of dollars of death benefit for the family, and it guards against those charge backs that, realistically, DO happen.

What's your opinion from a financial advisor's point of view?

I may be wrong, but I believe in your post I mentioned in my first post you did say the concept is good and will work, did you not?

Thanks again,
tinman

Think of advances as you taking a loan against your future income (as long as the people keep making the premium.)

Would you take a loan (even an interest free one) to buy life insurance? I would not.

You can make unbelievable money in this business. Just selling life insurance. Why try to reinvent the wheel.

Just start out taking 75% advances. If you want to get to as earned (not all agents do) take some of your companies off advance once you are cash flowing well. Work your way to all as earned if that is a goal of yours.

You don’t need to be creative to become wealthy in this business. Just sell a lot of insurance.

 

[DHK]

I may be wrong, but I believe in your post I mentioned in my first post you did say the concept is good and will work, did you not?

The concept works best for your normal spending patterns and other emergencies. If your car blows up, you can buy another car... but generally after the 5th year or so - depending on the funding and the structure of the contract.

Now, can it be done for a business context? Absolutely. But it takes time to build up to use it properly. Even with a max-funded, option B death benefit IUL, with waiver of surrender charges... I just wouldn't want to count on it initially.

However, in my opinion, "don't get them" is unrealistic. There are a lot of reasons people stop making their premiums. They lose their job and can't afford to pay it. They move, stop paying, and the agent has no chance to save the policy. People forget to pay the premium and it lapses. Etc, etc.

True - stuff happens. But that's why you keep prospecting and keep selling.

You're trying to mitigate risk. That's good. You're doing it the wrong way. You need business skills to mitigate your business risks.

If you're selling 5 policies a month and you get one chargeback... you've got a problem. If you're selling 20 policies a month and you get one chargeback... your problem is far lower. That's how you mitigate your risk - prospect and sell more.

 

[DHK]

I'll just leave this one here: The value of preparing for regulations | MDRT Blog

 

[VolAgent]

The best way to avoid chargebacks, make sure the people bought and weren't sold. When people buy it because they believe in it and want it, they will work harder to keep it. When you sell them with razzle-dazzle, they will cancel at the first excuse. They may even call up the company and cancel as soon as they get the policy.

After that, yes life happens but generally a conservation call will keep most of the potential lapses on the books. You'll lose a few, but it won't be that many. Then it is a matter of what DHK and Newby said, keep selling and gradually go as earned with companies as cash flow allowes.

 

[donamese]

Just to add clarification as well, you can be charged back even when on an as earned basis. If the client is drafted on the 1st, but the payment doesn't go through, you may be paid upon the draft then charged back after the carrier realizes they are not getting the money. Or the money could be applied to the client then the client cancels the policy a day later. Granted these are small chargebacks but they can occur. Rescissions are always a possibility as well and some of the most significant chargebacks that occur (though much less frequently).

 

[AZtinman]

DHK & Newby,

I thank you both very much and appreciate your words.

I also understand what you both are saying.

I think anyone on this forum would be foolish to ignore and disregard anything the two of you and Todd King have to say.

Have a great day!
tinman