The Life Insurance Commission Shock: Whole Life Commissions vs. Mutual Fund Expenses

“Last week I bought a life insurance retirement policy. All I’ve got to do is keep up the payments for 15 years, then my agent can retire.”

How much commission does a life insurance agents make? You might be very surprised…

In the last two weeks, we have exposed the shocking affect that those “little” mutual fund commissions can have over time. First, we showed how the average American family loses six figures (an average of nearly $155k) of their retirement to fees and commissions. Last week, we demonstrated how qualified plan participants who leave their dollars in target-date retirement funds (or other mutual funds) can lose up to 79% of their hard-earned dollars to the tyranny of compounding fees.

But what about the commissions you’ll pay on whole life insurance? Aren’t they even worse!?

Financial authors and educators name “huge commissions” as proof positive that whole life insurance is a terrible financial strategy. Insurance agents are rumored to take home 80%, 90%, or more of the first year’s premium, which is difficult for many people to stomach. But is this the whole truth?

Recently, Tom Dyson at the Palm Beach Letter and Palm Beach Wealth Builders Club investigated this and published a ground-breaking report called “The Shocking Truth about Life Insurance Commissions,” exclusively for their paid subscribers. (Palm Beach Letter publishes exclusive newsletters about lesser known investments and money-making opportunities used by the wealthy. They do not sell insurance or receive insurance commissions.)

The special report showed the real facts and figures – how life insurance commissions work, and how these insurance cash value accounts (and the commissions) compare in the long run with mutual funds. We were so blown away by what they discovered that we begged their permission to share liberal portions of this “for paid subscribers only” report with our own readers. (Fortunately they said “yes”!)

An Evening with a Life Insurance Agent

Dyson begins by describing his first meeting with an insurance agent from a mutual life insurance company, which happened to be Northwestern Mutual. (This was before he knew about the “Income for Life” strategies that Palm Beach Letter endorses and that Partners for Prosperity have assisted people with for years.)

At the time, Tom and his wife weren’t sold on permanent life insurance. Plus, they were frustrated that the agent was prying into their personal finances and taking up too much of their time. Tom started looking for a way to cut the meeting short. As Tom tells it,

I knew the perfect question to end the meeting…

“So how much commission do you make from this policy?” I asked.

“I take a 100% commission,” he replied.

I was expecting a high number, but this seemed impossible.


“That’s right,” he said. “We take 100% of your first year’s payment as commission.”

No wonder everyone thinks permanent life insurance is a rip-off, I thought. And with that, we excused ourselves and left.

Life insurance companies have a reputation for charging the highest commissions in finance. This reputation is so bad that you can find pages and pages on the internet telling you “Why permanent life insurance is a scam” or “7 reasons not to buy whole life insurance.”

Best-selling financial authors campaign against permanent life insurance because of the fees, and even your financially-savvy friends are likely to hold the same beliefs. “Buy term and invest the difference” is the typical financial advice, and with mutual fund fees so much lower, it seems a no-brainer.

That is, until you look at the whole truth.

Tom didn’t think the agent would try to rip them off. He had come recommended and worked for a well-respected company. And Tom knew the government regulates life insurance fees and commissions, and anyone overcharging their customers would lose their license – or worse. But how could such a high commission make sense in any situation?

How a High Commission becomes a Low Commission

What Tom didn’t know back then was that the first-year commission (which is not nearly 100% in a properly-set-up policy, as we’ll explain) actually becomes a great deal after 10 or so years. But he realized that to compare fees on investments, you can’t look at just one year.

So Tom and his team looked at the big picture. And when they did, their research revealed that life insurance commissions are “one of the biggest misunderstandings in finance.”

They evaluated the fees that investors were charged over 10, 20, 30, and 40 years. Shockingly, the numbers revealed that a mutual fund that is otherwise identical (same rate of return, same investment dollars) would have to charge as little as 0.15% to match the results and take as few fees as a permanent life insurance account set up the correct way! Dyson explains,

Life insurance companies charge a 100% commission on the first year payment upfront. Then the fees taper off. Mutual funds charge almost nothing in year one. Then the fees get bigger every year. To compare the two, you have to add up how much you’d pay over the entire life of the investment, under identical circumstances.

When the Palm Beach Letter team did just that, the truth became obvious. Dyson concluded, “Permanent life insurance has LOW fees. You can end up paying less than 0.15% in annual fees. That’s as low as it gets… lower even than the famously cheap Vanguard Index funds.”

We’ll let Tom demonstrate with a concrete comparison and some simple charts to illustrate. You’ll never look at life insurance the same way again!

The Big Commission vs. “Little” Fees Experiment

Dyson’s team downloaded the fee schedule of American United Life Insurance Company and produced a 40-year simulation in an Excel spreadsheet. They used actual data from a life insurance policy, starting at age 62. Then they added up the total amount of fees the policyholder would have paid to hold this policy.

Next, they produced a 40-year simulation of a mutual fund investment. They put the exact same amounts of money into the mutual fund each year, on the same dates, as for the life insurance policy. And they grew the money at the exact same rate. Then they added a 1.5% annual management fee to the mutual fund.

(In the mutual fund business, this annual fee is called the “expense ratio.” The mutual fund industry claims its average expense ratio is 1.31%, but according to research by Forbes and the WSJ, mutual fund customers actually lose an average of 2.75% per year to expenses. That’s because trading costs generate an expense of 1.44% per year on average, but mutual funds don’t have to report them.)

What Did Dyson’s Team Discover?

After 10 years:

Life Insurance fees = $33,825
Mutual Fund fees = $34,160
Life Insurance account value = $340,552
Mutual Fund account value = $345,297

So far, the mutual fund seems to have generated slightly more equity, in spite of (barely) higher fees. But what happens next might surprise you:

After 20 years:

Life Insurance fees = $39,075
Mutual Fund fees = $108,111
Life Insurance account value = $734,269
Mutual Fund account value = $607,534

The mutual fund now fees are now over $69,000 higher than the life insurance fees – a difference of 276%! Even more surprisingly, the life insurance account value exceeds the mutual fund balance by over $126k!

After 30 years:

Life Insurance fees = $44,325
Mutual Fund fees = $226,242
Life Insurance account value = $1,280,336
Mutual Fund account value = $921,889

The more years that pass, the wider the gap becomes in both fees and equity!

After 40 years:

Life Insurance fees = $49,575
Mutual Fund fees = $397,336
Life Insurance account value = $2,017,154
Mutual Fund account value = $1,298,721

The bottom line is that “little” 1.5% mutual fund fee generated eight times as much fees as the life insurance policy over 40 years. More importantly… that 1.5% mutual fund fee caused a difference of $718,433 in final account value… for a loss of 36%.

Next, Dyson’s team calculated what fee a mutual fund would have to charge each year to compete with a properly structured dividend-paying whole life insurance policy. Here’s what they found:

After 20 years, the fees in the life insurance policy equate to what would be a mutual fund with an annual 0.50% fee.

After 30 years, the fees in the life insurance policy equate to what would be a mutual fund with an annual 0.25% fee.

After 40 years, the fees in the life insurance policy equate to what would be a mutual fund with an annual 0.15% fee!

How Small Fees can Create Big Damage

Not only did the high commission end up costing very little in the end, but those 1.5% expenses compounded each year to cost the investor multiple six figures! Dyson explains why:

There are two ways you can extract fees from an investment…

First, there’s the standard mutual fund way, which is now the standard Wall Street way. They assess your fee on the total money under management, once per year. It could be 1% per year. Or 2% per year. The fees get bigger and bigger as the money grows. They compound. This is Wall Street’s little secret.

In other words, you pay the same fees again and again… on the same money, year after year! And you don’t simply lose the fee, but you lose the money the fee could have earned. (We call this your opportunity cost.)

I never realized how devastating these “little” fees could be until I started investigating this issue. Look at this chart. The green dots represent your account growth. And the red dots represent the fees your account generates. Look how the fees grow in size as your account value grows in size.

chart of fees accumulating in traditional investment account

We already know that mutual fund fees add up over time. But what about those big life insurance commissions?

Then there’s the life insurance method of charging fees. First, the insurance company bases its fees on the money you put into the policy each year, not the account’s total value.

You pay the fee once, not year after year on the same money. And you don’t pay the big first-year commission (which can be as high as 100%) on your whole premium, rather, only on the base premium portion. And the way we set up policies using the Income for Life strategy (a key strategy of Prosperity Economics, coined by the Palm Beach Letter as Income for Life), the base premium is usually around only 35% of the actual money you’ll put into the policy in its first four years.

Then the insurance company front-loads the fees. So you pay a big fee upfront, a small fee for the next 8-10 years, and then a maintenance fee for the remainder of the policy.

This way, the fees shrink instead of growing. Look how the fees (the red dots) get smaller with each passing year.

chart of life insurance commissions

It’s a vital distinction. And it makes a big difference. How big?

After 40 years of collecting fees, the mutual fund’s red dot – and the fees you would have paid – are eight times larger than the life insurance strategy’s red dot – and fees. Look at the charts again, and notice how the fees paid for the mutual fund strategy total eight times the Income for Life insurance saving strategy.

The report concluded,

Investing the same dollars at the same time and growing them at the same rate, the mutual fund generated $347,761 more in fees. And because the fees obstructed the compounding power, it ended up with $718,433 less in the account after 40 years.

The bottom line is that you don’t need to worry about fees and commissions when it comes to buying permanent life insurance. As long as you hold your policy for more than a few years, the fees are tiny.

Instead, you should be concerned with the fees you’re paying on your mutual funds and in your 401(k). Because whenever you pay a fee based on your total account value—even if it seems like a small percentage—you’re getting ripped off. That’s because the fee compounds as your money compounds and eventually becomes enormous.

Once you understand how life insurance commissions work over the long haul, you shouldn’t let them get in your way of making a decision based on what is best for YOU.

Where can your money grow safely, shielded not only from taxes on the growth, but FEES on the growth?

In a permanent life insurance policy! But you can’t just get any permanent life policy (some are bad news), or even any whole life policy. The key to maximizing your cash value is setting up the right policy correctly with a PUA (Paid-Up Additions) rider. The proper rider allows the cash value to grow much more quickly in the early years of the policy.

Why is it important to set up a policy with a Paid-Up Additions rider? Because these riders allow the policy owner to store more cash in their policy while AVOIDING paying the high first-year commissions on that money. The cash for the paid-up additions goes almost immediately into the cash value of the policy, where it can grow protected from

Thanks again to the Palm Beach Letter for their ground-breaking research. You can find them at

Are you ready to save money with less risk and lower long-term fees?

To find out more about how you can start your own Income for Life/ high cash value whole life policy, contact us for a no-obligation consultation. Our own Kim D. H. Butler is one of the top experts in the country on innovative financial strategies that utilize dividend-paying permanent life insurance (also called “whole life” or “participating” insurance). You can also explore how else this strategy can benefit you by reading Kim’s best-selling little book on life insurance, Live Your Life Insurance.

NOTE: Some readers have commented that it is misleading to compare the returns of mutual funds with the returns of whole life insurance. While returns are NOT the focus of this article, and while it would be irresponsible to compare returns of a liquid, guaranteed asset (that also has a death benefit) with an asset with constant downside risk as if the two were otherwise equal, we invite anyone truly interested in whole life returns to watch the video in the article “Is Whole Life Insurance a Good Investment?” The article discusses the truth about whole life returns, and in the video, Todd Langford, a software software developer, uses real numbers from both a whole life policy and the stock market.


8 Responses to The Life Insurance Commission Shock: Whole Life Commissions vs. Mutual Fund Expenses

  1. Pingback: Organize Your Finances for Prosperity! (P4P's Annual Review Checklist) | Partners for Prosperity

  2. Walter Barnes says:

    Hi Kim looking to set up my own policy as described above. Was wondering if you could help guide me in the right direction. Which company you recommend?

  3. Kate4Kim@P4P says:

    Thanks Walter, I trust Kim has already been in touch with you.

    The question of “which company” is an interesting one… there is a saying that “there are no deals in the insurance industry,” which essentially means that there is very little difference between the 100-year old mutual insurance companies; they have been doing what they do (and all using the same actuarial tables) for a very long time! That being said, sometimes for reasons of qualifying, or preferences in other things (such as a specific rider), sometimes a particular company is a better “fit.” These are the things we can help our clients with as they go through the process.


  4. Patrick says:

    If you assume the same rate of return on the two scenario’s you are misleading your readers. Your example assumes the rate of return on your investments will match the historical stock market return you could expect from a well managed mutual fund with low fees. I doubt any honest whole life salesman would mislead his clients by promising to make market returns within a whole life policy. I’m certain you are not unaware of this discrepancy in your example. The fact that you didn’t explain this is disturbing to say the least and calls into question the sincerity of you’re motives. You certainly are not looking out for the folks.

  5. Kate4Kim@P4P says:

    Thanks for your comment, Patrick. In this article, the focus was on commissions and the great misunderstandings in how those work and what they cost. We assume most of our readers are well aware of the claims of mutual fund returns, if they have read even 1,000 words in any typical financial book or magazine. They are also well aware of the risks, if they held mutual funds in 2008-2009.

    Certainly there are MANY differences between mutual funds and a whole life account, and none of those differences was the focus of the article. Yes, mutual funds often reflect a greater average rate of return, but with less stability, as gains are never “locked in.” Usage of funds are very different, you cannot borrow against your mutual funds with ease for any reason. Taxation is different. Gifting to heirs works differently. Only one has a death benefit.

    Although you may assume the opposite, we do not describe whole life insurance as an “investment” to our clients (though perhaps we quoted someone who did; much of this article was taken from the Palm Beach Letter, as described.) We consider cash value a good place to STORE CASH. It makes a better comparison in some ways to certificates of deposit, though again, they are apples and oranges to a large extent. We do not recommend to our clients to “stop” at whole life/cash value (nor do we suggest to most of them NOT to buy term insurance, many need it to obtain adequate protection). There are different products that we recommend as “investments” to clients (particularly accredited investors) who wish for investments that produce a competitive rate of return (greater than cash value) that will not roller coaster ride like the market. Others are happy to ride the roller coaster and can stomach the risks as well as the fees (or perhaps they are not open to alternative ways of investing.)

  6. Mike says:

    I think that this post really serves to show the problem with high fee mutual funds, rather than the advantage of life insurance. The biggest Vanguard products have a total expense ratio over only .05%.

    I think another misleading piece here is comparing the total expense ratio of a fund to the commission of the life insurance salesperson. The life insurance company also has annual expenses in managing their portfolio, and in fact in many cases will be investing in these same mutual funds. These expenses will be deducted from the portfolio growth of the portfolio.

    If you want to compare apples to apples the fair comparison would be the trailer paid to a broker by a mutual fund to the commission paid to a life insurance broker. I think you’ll find in both cases the answer is that the fee is unacceptably high.

  7. Kate4Kim@P4P says:

    Thanks for your comment, Mike. We agree that “typical” mutual fund management fees are too high, and that if someone wants to participate in the market, they are better off doing what you’re doing – using very low overhead products such as what Vanguard offers. (And yes, that is a main point of the article – the problem with mutual fund fees.)

    We also agree that the way that permanent insurance is typically sold, that the commission is also too high. That’s because structuring a policy for maximum cash value (as we do) means structuring it for less insurance – and less commission. We design policies with maximum PUARs (paid-up addition riders) that raise the efficiency and rate of return on the savings portion and reduce the insurance coverage as well as commissions, because growing cash value faster is what most of our clients want.

    Comparing “apples to apples” – If a client puts $10k per year into life insurance vs. a qualified plan or mutual fund with a fee (and only rarely do qualified plans offer true low-cost funds), the difference over 30 years in commission can be TEN-FOLD… or more! (As low as less than $10k commission over 30 years vs. $100k or more, depending on earnings.)

    Life insurance gets a bad rap because the fees are “front-loaded” and the impact of this is seriously misunderstood. But there are further misunderstandings, as your comment illustrates. No, mutual insurance companies are not buying mutual funds with the dollars in your whole life policy. They have a different business model, which is why insurance dividends tend to perform very well when stocks are bottoming out. And the cash value guarantees are NET – after fees and cost of insurance have already been subtracted. And for over 100 years, earnings above the guarantees in the form of dividends have been paid to the owners of the company, which are the policyholders.

    Ultimately, clients should do what is best for THEM – regardless of commissions paid or not paid. We just hate to see people writing off a product because they believe they will pay more in commissions (when they won’t.)

    And of course, a low fee mutual fund doesn’t guarantee any profits at all. Ultimately, an “apples to apples” comparison is impossible between stock market funds and permanent insurance. Cash value insurance is more properly compared with savings vehicles and cash equivalents due to the safety and guaranteed growth aspect, and even then, it’s not apples to apples, because you’re not going to get a permanent death benefit or potential disability income with your certificates of deposit!

  8. Pingback: How Much Commission On Whole Life Insurance | Help Me Insurance

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