Commission charge-backs: You better watch out, you better not cry ...

Well, you better reread your life insurance agent contract. Especially pay attention to the clause concerning commission charge-backs, charge-back policy and the like. This clause, familiar to me for 40 years, was primarily used for instances of un-earned premiums — a person drops his policy and you were paid commissions up front, you need to repay those commissions that were not earned. Fair enough. The current verbiage, though, is if a policy lapses or is dropped during the first 12 months, all commissions are charged back.

For example:

• Joe takes out a loan for $1 million and wants to insure it. You sell Joe a policy, and he pays the premium for 10 months. Joe has a windfall and repays the loan in full, no longer needing the coverage, and lets the policy lapse. Wake up! The insurance company keeps all the premiums as earned for the 10 months and demands you to repay them all commissions you have received. What? Read your agent contract.
• Betty and Richard, wanting to protect their business, purchase a $2 million life insurance policy for the death taxes computed based on today’s tax laws. In 11 months, our government changes the law. This estate doesn’t have a need for all of the coverage any longer. They reduce or drop the policy, and guess what? The insurance company keeps the premium but charges you all the commissions you’ve received. What? Read your agent contract.

I asked my assistant if she would work for me for one year and allow me to charge back her pay if I wanted. I’ll let you imagine what her answer was. There are some contracts that have a charge-back for even two years.

We simply cannot be expected to work for free. If premiums are earned, then commissions should also be earned. If premiums are rightfully returned, then commissions should also be returned. If the pricing of a product is too tight for commissions to be paid, then I would suggest repricing the product.