The effect of commission versus non-commission benefits on customer value: The case of life insurance policy performance

In financial services, sales commissions are earned by stockbrokers, real estate agents, and insurance agents, among others sales people. In these examples, some degree of negotiation of commissions between the sales person and the consumer can take place. Today's permanent life insurance products in the United States usually include a feature that offers term insurance on the insured as a rider to the base policy. A benefit of allowing the mixing of permanent with term insurance in one policy is that the term coverage carries no commission to the agent, allowing the agent to trade off compensation in favor of enhanced cash value performance. Looking only at cash-on-cash return---premium contributions versus cash surrender value---this research compares the impact of mixing base and term in a flexible premium policy as against several other variables in terms of whether the exchange of commission for living benefit performance has value for the client or the agent. This study uses data from major life insurance carriers to estimate a series of multiple regression models that test for the effects of the mixing of permanent and term coverage on policy performance. The result found is that there is insufficient statistical significance between this mixing of coverage and resulting cash values to be a reliable predictor. Then, a discounted cash flow (DCF) analysis on the enhanced cash values to the client from a mix of term coverage was compared to a similar analysis on the lost compensation to the agent, to determine the proportion of compensation an agent must lose to gain a better competitive position for his/her product offering in terms of client value. The result was that while modest reductions in agent compensation resulted in substantial gains to the client in "target premium" funded cases, the tradeoff was much less pronounced in "maximum funded" cases, where the client's motivation for cash value rather than death benefit means that this tradeoff is more likely to take place.