Factors To Consider When Expanding Into Life Insurance

Despite concerns about life insurance company solvency and uncertainty over health-care reform, now is still a great time for property-casualty agencies to offer their clients life and health insurance products and services.

I say this for two reasons. One, research I've seen recently says that an agency can increase profits by up to $40,000 for every 1% increase in client retention-and selling life and health products to your clients definitely increases retention. Two, in an ever-changing marketplace, your clients still need someone whom they trust to tell them what is going on and to help them find the best products that fit their needs. Agencies that offer life and health policies along with traditional P/C insurance can tighten their grip on clients while serving them better, increase their profits and keep their competition at bay.

An agency must consider many factors when expanding into life/health insurance. I'll address a few of them in this article, including hiring and compensating producers, and setting up contracts with them and insurers. I'll also briefly discuss the opportunities that disability income insurance and individual long-term care can offer you.

You can get a life/health operation off the ground in three ways. You can hire a full time producer, work with life general agents in your area, or work with life salespeople from your existing P/C companies.

The last choice is definitely the least costly. You don't have to hire new employees or add another department. You receive the full agency commission on every life sale the company rep makes for you. And if you are unsure about your clients' interest in life/health products, a P/C company representative offers you a way to gauge that interest without a large investment.

Life general agents can offer your agency a few more benefits than some company reps can. They normally represent larger life companies and have a higher level of expertise in the business. They usually can give your clients a wider array of product choices and often provide better service. In most situations that I've seen, the P/C agency receives the agency commission on each life/health sale, and the GA gets an override on it, an arrangement that is lucrative for both parties. For example, one P/C agency worked with a life GA on a sale that generated a $50,000 commission for the agency. Although it took three months to close the sale, the agency told me it was well worth the effort.

Finally, you can hire a full-time life producer to work out of your agency. Experienced producers will give you a quicker return on your investment than inexperienced ones will. Good life producers know that you can give them excellent leads, a situation they greatly prefer to making cold calls. And good life agents prefer to be out selling instead of sitting in an office. You should be skeptical of any life producer who spends more time in the office than he or she does on the street.

Hire a life producer as you would any new P/C producer. Check the producer's background and be sure he or she has a good track record. Evaluate him or her as you would other potential producers. Give a potential life producer the same tests you give potential P/C producers. You want to be sure a new life producer fits in with your agency. You don't want someone with a 'me' attitude coming into an agency that takes a 'we' approach to doing business. Of course, always use your instincts and good business sense in making your hiring decision.

The commission you make on life/health business differs a bit from that you make on P/C sales. Generally, renewal commissions are much lower for life/health products than they are for P/C lines, which is why life producers are so intent on selling new business. You will earn most of your commission in life/health on new business. Thus, you should make your life producer's compensation commensurate with production. This gives him or her an incentive to generate more business.

In many of the compensation agreements that I've seen, the agency and the life producer split the commission income 50-50 up to a certain level, usually $100,000 or $120,000. Once commission income exceeds that, the life producer's share increases. You can afford to do this because your expenses generally remain constant despite the growth in life/health business. Of course, your share of the commission should cover your expenses (especially if you pay for the producer's secretarial help, office space, utilities and benefits) and give you a proper return on your investment in the life/health operation.

Always base the agent's compensation on  commission that is actually paid to the agency. That might seem elementary, but some life producers like to discuss commissions based on projected business. You wouldn't pay your P/C producers that way, so you shouldn't use this approach with a life producer, either.

If you provide the life producer with an expense account or a retirement plan, you should adjust the commission schedule accordingly to cover your costs. If you have any questions about a compensation plan, set it up conservatively. It's much easier to pay producers a bonus if income exceeds expectations than it is to try to scale back their compensation if it doesn't.

Let your P/C producers benefit from life/health sales, too. Many agencies compensate the P/C producers for leads that turn into new business. In most situations I've seen, the P/C producer who provides the lead receives 10% to 25% of the agent commission on the life/health sale; the life producer gets the rest. You can allow the life producer to benefit from leads he or she gives to P/C producers, too. Shared commissions are usually restricted to only the first-year commission on new business, but they help build teamwork between the life and P/C producers.

You should use the same employment contracts for life producers that you use for your P/C producers to avoid any problems involving discrimination. Regarding non-compete agreements, you won't be able to prevent a life producer from pursuing new business in your marketing area, but you should keep him or her from soliciting your current clients.

The most important thing to do is to arrange all company contracts in your agency's name. Don't accept a life producer's personal contract with a company because the producer can take that contract, and the business associated with it, to another agency. Even if a producer assigns business to your agency while working for you, he or she can reassign it elsewhere upon leaving. That means your agency loses the renewal commissions.

When the company contracts are in your agency's name, the agency receives all the incentives, overrides, and benefits. You can then share them with your life producer. Ask the companies to give you sub-producer codes for all the producers in your office. The codes make it easier to track sales by producer and to determine who receives bonuses. For example, we had a contract with one life company that paid us overrides and contingencies. We then paid each producer a percentage of the amount received. This gave them an incentive to produce more business because they shared in the profits.

If a contract is in a life producer's name, that producer receives all the bonuses and overrides. In one situation, a life company told an agency that it had paid $10,000 in commission on the agency's business, yet the agency received only $8,000. The other $2,000 went directly to the agent who held the contract with the company.

You often can arrange contingency agreements with life/health companies that are similar to the ones you have with your P/C carriers. Contingencies can vary from lump-sum payments, which I've seen get as high as $50,000, to increases in agency commission for all production exceeding a certain level.

You also want to ask if you can get a general agent contract from a life/health company. If you cannot get a GA contract initially, find out what it takes to get one. GA contracts can be lucrative regarding overrides and contingencies.

With regard to accounting, set up a life/health department on your books like any other department in your agency. Allocate appropriate expenses for utilities, rent, personnel, etc. You may lose money if you try to absorb the costs of a life/health department into the P/C side of  business. Proper accounting will allow you to see if the department is making money.

Life insurance is much easier to service than P/C insurance, because you ultimately deal with only one claim on the life side. Life clients sometimes change beneficiaries in their policies, but that takes just a few minutes to do. Health insurance programs can be more complex to service, so you should decide if you can handle these accounts with your current staff or if you need additional personnel.

Finally, you'll probably need a third-party software program to help track your life/health business more efficiently. We obtained such a program, and the software gave us information on our life business much faster than our existing system could. The software helped us track commissions from our life/health companies, and we used it to find several instances in which companies owed us money. We more than covered the cost of the upgrade with the missing commissions it helped locate.

If life insurance products seem too unfamiliar to sell, disability income insurance might be for you. Disability insurance is an easier product to understand, and many people don't have it, which gives you an excellent selling opportunity.

One need for disability insurance is in connection with buy-sell agreements. Most businesses fund their buy-sell agreements with life insurance, but many, including P/C agencies, are remiss about backing them up with disability insurance. Buy-sell disability is a large, untapped market with some substantial commission dollars associated with it. If you can get clients to consider disability income insurance in their buy-sell agreements, you can generate some handsome revenues.

Another product that offers P/C agencies a lot of potential is individual long-term care. If you can make your clients understand the severe limitations that Medicare places on paying for nursing home care, you can open the door to selling the product. Some recent data I read indicated that only 3% of the people in nursing homes qualify for Medicare coverage. Most of the remaining people are draining their assets or estates to pay for care. One point to keep in mind is that older producers have a better chance of selling this product than younger ones do.

Life, health, disability and long-term care insurance are products that you can add to your arsenal to fight off competitors. They can help you retain clients and expand your business. More important, they can add profits to your bottom line, and that is a struggle we all want to win.