Paying Interest on High Contracts

[usakr]

I'm new at all this so forgive the question. Somebody told me if you have a contract higher than 100% you pay interest on the amount above 100%. So If I have a 115% I would pay interst on the 15%. I don't understand this. Does anyone know how this works?

 

[maksim]

Are you refering to interest on annualized premiums?

 

[usakr]

Yes, interest on Annualized Premiums.

 

[maksim]

If someone pays you a premium for a policy monthly, the insurance company will at their choice pay you the annualized commission up front. But for that money.. they charge you interest, like a loan. Reason why, is... well, you dont earn your commission until the first year, full premium is paid.

 

[usakr]

O.K. I haven't really paid attention to my commission statements. So what your saying is, if I write $1000 in AP and I get 9 months advanced and the other three months as earned I won't be getting the full $1000? I'll get as an example $960? Is this correct? If so it doesn't matter if your at %100 or %115 it has nothing to do with the % just the fact that they advance you. Is that right?

 

[maksim]

when i worked captive, it didnt apply to me, but for some firms, i have heard of this being charged. yes.

 

[TristanTLC]

the interest has nothing to do with the contract size. Most "advances" are actually loans. The scenario you gave of having 1K in ALP with a 9 month advance, that would be a commission of 750 on month one. When they give you that 750, they charge you an interest on that 750. The interest can either be taken out of that 750, or it can be taken out of the remaining 250 that is to come later.

Some companies do true advance with no interest, most companies do an interest on their advance. It doesn't matter your contract size, only your advance.