Life Insurance Commission Payouts – Examples of Annualization and
Target Premium
This short document provides some general examples of how life insurance carriers calculate
commissions on policies. These are examples and each carrier has their own rules. Please contact Imeriti
if you have specific questions.
Example 1 – Annualization Percentage Below 100%
Carrier X has the following annualization rules:
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75% annualization per policy.
Carrier X does not pay commission on the policy fee; the policy fee is $5 per month.
Carrier X charges a 3% annualization fee to the agent.
If an agent writes a term policy that has a $105 monthly premium, and that agent is on a 95% payout
based on this product, here is the following breakdown of commissions:
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The total commissionable annual premium is $1,200 ($105 monthly premium X 12 months - $5
per month policy fee that is not commissionable)
The agent will receive an upfront commission of $829.35 ($1,200 (Total commissionable annual
premium) X 75% (annualization per policy) X 95% (product payout) X -3% (annualization fee))
Since 75% of the commissionable annual amount is paid upfront to the agent, the remaining
25% will be paid once the paid premiums exceed $855 (the annualization fee is not subtracted
from this number).
Assuming the client makes the regular, planned premium payments, in month 10, 11, and 12 the
agent will receive $95 each month ($105 (premium) - $5 (non-commissionable policy fee) X 95%
(product payout))
The total year 1 payout would be: $1,114.35 ($829.35 (upfront annualization amount) + $95
(month 10 commission) + $95 (month 11 commission) + $95 (month 12 commission)).
Example 2 – Annualization Cap Per Policy
Carrier Y has the following annualization rules:
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100% annualization per policy
Carrier Y has a cap on the total amount of annualization per policy of $6,000
Carrier Y does not charge an annualization fee to the agent
If the agent writes a term policy that has a $1,000 per month premium, and that agent is on a 100%
payout based on this product, here is the following breakdown of commissions:
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The total commissionable annual premium is $12,000 ($1,000 monthly premium X 12 months)
The agent will receive an upfront commission of $6,000 ($12,000 (Total commissionable annual
premium) X 100%, but since this is greater than $6,000, the cap of $6,000 applies)
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Since $6,000 of the commissionable annual amount is paid upfront to the agent, the remaining
$6,000 will be paid once paid premiums exceed $6,000.
Assuming the client makes the regular, planned premium payments, in month 7 through 12 the
agent will receive $1,000 each month ($1,000 (premium) X 100% (product payout))
The total year 1 payout would be: $12,000 ($6,000 upfront payment + $1,000 (month 7) +
$1,000 (month 8) + $1,000 (month 9) + $1,000 (month 10) + $1,000 (month 11) + $1,000 (month
12)).
Example 3 – Understanding Target Premium Payout
With term policies, the target premium always equals the paid premium. However, with permanent
policies (universal life, index universal life, etc.) the target premium is typically less than the premiums
paid. Target premium is a complicated formula that is never shared by insurance carriers and is always
different per carrier. The following items are some variables that go into the calculation of the target
premium: age of client, underwriting class, type of product (accumulation versus death benefit), and
smoking vs. non-smoking.
It is important to understand that agents are paid the majority of their commission on target premium,
not the total paid premium on permanent insurance. Agents are paid a small amount on the excess
premium (typically 1-2%). Excess premium is the different between paid premium and target premium.
For example, if Carrier Z has a product with a 85% payout on target premium and 2% payout on excess
with the following variables:
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Paid premium is $10,000 per year.
Target premium is $7,000.
Excess premium is $3,000 ($10,000 (paid premium) - $7,000 (target premium))
Total commission paid to the agent will be $6,010 ($7,000 (target premium) X 85% (product
payout) + $3,000 (excess premium) X 2% (excess payout)).
Each carrier has their own rules regarding payouts, annualization, target premium, etc. If you have
questions, please contact Imeriti.