A proposal to cut large upfront commissions on Life Insurance Products is under consideration at IRDAI. And I welcome it even though it means lesser revenue in the short run. Let me tell you why.
Life insurance is one of the most lucrative products to sell in the financial space. The commissions go as high as 50% of the first year’s premium. That seems a lot. But the commissions upon renewal are tiny. Something like 0.50% of the premium.
Let me give an example. If the premium is ₹50,000, the commission your insurance agent receives with additional bonuses etc. can go as high as ₹25,000. But typically, without inventives, the commission would be ₹15,000. From 2nd year onwards however the annual commission would fall down to just ₹250.
To put it in perspective, health insurance, which is a very high service product, offers first year commissions around 18-20%. The renewal commissions range from 4-8%.
Until very recently, mutual funds also offered upfront commissions. While not as large as insurance commissions, the low percentage was compensated by comparatively high investment amount. Today, the upfront structure stands completely abolished.
By bringing Life Insurance commissions structure on par with above mentioned products, IRDAI will incentivise good practices in the entire industry. Focus will move from selling insurnace to providing service to the clients. And on the part of agents, the pressure of continuously getting new business will ease off as the old business will still pay a reasonable commission going forward.