Traditionally, retail life insurance products have paid compensation primarily in the first policy year, and for good reason.
Life insurance is hard to sell. The underwriting process is cumbersome and takes time. Equally as important, life insurance has historically been sold by agents who needed heaped commissions in order to put food on their table as they begin their careers in the business.
Over the past decade, those factors have started to change. Underwriting is getting easier with accelerated and non-med processes. Life insurance is increasingly sold by experienced advisors who have multiple business lines and are focused on building the enterprise value of their practice with recurring revenue.
Times have changed, but compensation structures haven’t.
That’s a problem for modern life insurance policies. Paying heaped compensation requires the life insurance company to “finance” the compensation at their cost of capital. Generally speaking, life insurers amortize the heaped commission through policy charges over the first ten policy years.
In total, policy charges related to commissions tend to be 2-2.5 times the actual target premium. To put it in different terms, the client ultimately pays 2-2.5 times the target in policy charges in order for the agent to receive a heaped commission. That’s not necessarily a bad thing, but it’s also not the most efficient way to price compensation into a life insurance policy.
Related: A Look at IUL Fees, Costs, & Illustration Manipulation
Enter the F&G Trailsetter℠ Life Insurance Product
The basic idea behind the F&G TrailsetterSM product is simple: pay commission as a percentage of premiums paid. That’s it.
Compensation to both the agent and the brokerage is a percentage of the premium. The compensation is paid for by a premium load that matches the compensation dollar-for-dollar, percentage-for-percentage.
In other words, the life insurer acts as an intermediary between the client and the agent and brokerage. The ratio of commission-driven policy charges to actual commission payouts is always 1-to-1 versus 1-to-2.5 in a typical heaped compensation policy. It’s an inherently more efficient design.
So where does that extra efficiency go? Well, there’s a wide spectrum. If the goal is to just match the same compensation as a typical universal life (UL) policy but spread it over the premium payment period (let’s say for seven years), then the benefit will go to the client in the form of significantly reduced policy charges.
Or, on the other end of the spectrum, the policy charges could be increased so that the overall charge structure looks like a typical UL, but now the compensation is twice what it would’ve been without any reduction in benefits for the consumer. The choice is up to the life insurer.
Transforming Efficiency Into Greater Total Compensation
In the case of F&G Trailsetter℠, the choice was to transform the newfound efficiency into greater total compensation. Street compensation is 9.5% of the premium. To put that into perspective, typical FIA products pay 6% of compensation with a 2% override and the potential to earn a 1% bonus, for a grand total of 9%.
F&G doesn’t publish the overrider percentage, but applying the same ratio of the street to override as in fixed index annuities (FIAs) yields an override in Trailsetter of about 3.5%, bringing the total compensation to around 13%. By annuity standards, that means Trailsetter pays good-ol’-days compensation.
The comparison to typical life insurance policies is a bit trickier. Taking out brokerage compensation at each insurer, I’m just going to focus on street compensation for Trailsetter and I’m going to assume that it’s 100% of target.
Take a look at how Trailsetter’s 9.5% of premium for a $15,000, seven-pay on a 41-year-old male compares to other indexed universal life (IUL) policies. The ratio of Trailsetter compensation to particular IUL compensations is to the right:
| Carrier & Product | Charges Through Year Ten | Street Compensation | Ratio |
|---|---|---|---|
| F&G Trailsetter℠ | $28,596 | $9,975 | 1.00 |
| Nationwide | $17,796 | $3,952 | 2.52 |
| Securian | $16,574 | $3,998 | 2.49 |
| AIG | $17,126 | $4,049 | 2.46 |
| F&G Pathsetter | $22,495 | $4,071 | 2.45 |
| Mutual of Omaha | $10,332 | $4,083 | 2.44 |
| Global Atlantic | $22,863 | $4,108 | 2.43 |
| PennMutual | $20,601 | $4,148 | 2.40 |
| Symetra | $23,491 | $4,609 | 2.16 |
| John Hancock | $43,242 | $4,736 | 2.11 |
| Lincoln | $25,798 | $4,880 | 2.04 |
| Pacific Life PDX 2 | $26,967 | $5,569 | 1.79 |
| Pacific Life Horizon IUL | $29,716 | $5,569 | 1.79 |
| Allianz | $33,299 | $6,007 | 1.66 |
F&G Trailsetter℠ Compensation Impresses
F&G Trailsetter℠ pays a whopping 1.66-2.52 times more than other IUL products pay for the exact same cell. But take a look at the total charges through year ten: Trailsetter is expensive, but it’s not as expensive as some other products that have significantly lower compensation.
If you were to adjust these products to match the total commission to Trailsetter, then Trailsetter would be the cheapest product by a country mile, with the sole exception of Mutual of Omaha. The average cumulative charges for the other IUL products over ten years would be around $51,000, 78% higher than the F&G Trailsetter℠.
That’s the power of actually matching commission payouts with policy charges on a dollar-for-dollar basis. It’s just flat out a better mousetrap.
But it does create some weird optics. Typical premium loads across IUL products typically range from 3-9%, with a couple of outliers above that. The F&G Trailsetter℠ premium load is 19.5%. But if you think about it, that’s to be expected. Out of the 19.5%, somewhere in the neighborhood of 13% is directly related to compensation. The remaining 6.5% load would put Trailsetter in line with its peers.
Because compensation is paid for with a premium load, there are no per-thousand charges in Trailsetter above age 49 and the charge below age 49 is nominal. In that cell, for example, it’s just a couple hundred dollars a year compared to an average of almost $1,500 per year for the other products.
Related: IUL vs. GUL: Which Makes the Most Sense?
Surrender Charges for F&G Trailsetter℠ vs. Others
The other spot where Trailsetter zigs when you might expect it to zag is surrender charges. Given that there’s no heaped compensation, you’d expect that Trailsetter also wouldn’t have a surrender charge, but it does.
Why? For two reasons: First, surrender charges are important for setting investment duration. That’s why fee-based fixed products in Annuityland often have surrender charges even though they don’t have commissions. Second, and more importantly, surrender charges are a source of profit for life insurers. Consider Mutual of Omaha, which has the lowest policy charges of any IUL product in the group.
In that particular cell, it pays a target of $4,083, but it has a first-year surrender charge of $8,100. The target, of course, also pays an override to a distributor, but there’s clearly a profit margin being baked into the surrender charge. And this is pretty common, although there are some carriers who are clearly taking a different approach.
The thing about Trailsetter, though, is that the full (or nearly full) surrender charge is also surrendered margin because there’s no heaped compensation to cover. It stands to reason that surrender margin is a big line item for overall product profitability. But is that a problem? It just means that the surrender value in Trailsetter looks like any other IUL product.
F&G seems to have made a decision to specifically not court sales focused on early values or liquidity. It’s hard to fault them for that. Retail life insurance is sold as a long-term commitment. The same goes for the F&G Trailsetter℠.
F&G Trailsetter℠ Renewal & Excess Commission
Most life insurance policies pay 2-3% in renewal and excess commission, which makes it a pretty significant line item for an overfunded policy. The Trailsetter IUL also pays renewals, but it does so in the form of asset-based compensation. Trailsetter pays 20 basis points to the street and 10 basis points to the brokerage, both for 20 years.
Over time, Trailsetter’s asset-based “renewal” component is significantly more than typical renewal compensation. Using the illustration I was given with $15,000 in premium for seven years and assuming a $4,200 target, in line with peers, total renewal compensation would’ve been about $2,300 based on a 2% street payout and 1% brokerage payout.
But over 20 years, Trailsetter’s asset-based renewals would’ve paid out a total of nearly $9,000. It takes ten years to match what the standard renewal compensation pays out in seven years and everything after that is just gravy.
The F&G Trailsetter℠ is hardly the first product to provide alternative compensation structures, however. Early cash value riders have long offered spread compensation in exchange for better policy liquidity. The late, great MetLife Premier Accumulator UL (PAUL) paid a 0.85% asset-based trail. Sammons has a product with something like five different compensation structures.
What separates Trailsetter from the rest is that it not only changes the structure of the compensation but also pays significantly more compensation than any other product by any metric. Arguably, that’s what it’ll take for life insurance producers hooked on heaped compensation to consider moving to a level structure.
The carrot has to be big and juicy, and Trailsetter delivers – and does so without sacrificing illustrated performance.
Related: Why Now’s the Time to Re-Engage the Life Insurance Conversation
F&G Trailsetter℠: The Tesla of IULs
The Trailsetter is the first real shot-across-the-bow at heaped compensation that’s structured and priced to get agents to make the switch. It’s, analogically speaking, the Tesla Model S of IULs.
Prior to Tesla, all-electric vehicles (EVs) traded performance for efficiency, betting that the natural market for EVs were folks who were more concerned about the environment than performance. Tesla rewrote the script.
The Model S was (and still is) an absolute rocketship. The story for EVs then became about performance. Since then, some of the most successful EVs have been performance-oriented: from the 2,000-horsepower Rimac to the Porsche Taycan, to the Rivian R1T, a truck that goes 0-60 in three seconds.
The same logic applies to Trailsetter. F&G chose to make the compensation on Trailsetter so compelling that it simply can’t be ignored and – like the Tesla Model S – did so without sacrificing functionality and efficiency.
There will undoubtedly be agents who simply don’t want or can’t switch away from heaped compensation. But for many advisors, life insurance is a piece of their overall business and the F&G Trailsetter℠ presents a compelling option to build enterprise value in their practice while offering a product without a performance compromise.
Bottom Line on the F&G Trailsetter℠ IUL
The F&G Trailsetter℠ may not be for every advisor, but for those who are focused on building enterprise value, it offers a compelling option that pays 1.5-2.5 times more than normal compensation over the long haul without sacrificing performance.
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Copyright Life Innovators LLC 2021