Are commissions on whole life policies high?

This is a great question.  Dave Ramsey and others often use this as a reason not to purchase whole life insurance. 

Let's look at a couple of examples:

First, the commission on whole life is often 50% of the first year annual premium.  Typically, I recommend that someone put a minimum of about $3,000 a year into a whole life policy as the first year premium.  I'll make some additional comments on that later. 

Second, typically commissions are about 3% on residual or future premium payments. 

So, that first year commission is high, but remember that if you consider that you will own this policy for twenty to thirty to fifty years, that $1,500 isn't really much money.  When you average that over premiums of $150,000 over 50 years, that's only 1%. 

In addition, there are ways to reduce that commission.  A method that I recommend for most purchasers of a whole life policy is to set the policy up to be funded as fast as possible. (See my other posts for the reasons why.)  When structuring the policy, you can set a base premium (subject to the 50%) commission and paid up additions, which are subject to only a 3% commission. 

So, let's say that you purchase a policy with a $3,000 base premium and $3,000 of paid up additions.  The total commission is only $1,590, just over 25%.  Still high, but in terms of total dollars over the life of the policy, you'd likely incur less than 1%. 

When you purchase mutual funds through a broker, you pay a typical 5% commission.  In our example, of $6,000 invested the first year, you would pay only $300.  You've saved $1,290.  That's good.  However, over the next forty-nine years, you'd pay 2% more per year.  Using the base figure, you'd pay 2% of $147,000 or a total of $2,940 more.  Subtracting the $1,290 that you saved, you would actually pay $1,650 more in commissions over the fifty year period. 

You can see that the "high" commission on whole life insurance isn't really high after all.