Advances and Chargebacks
It’s important that agents understand how they’re getting paid and how the carriers manage advances and chargebacks.
With “household name” carriers like John Hancock, Mutual of Omaha, Americo, etc. this is very straightforward.
- The carrier will advance you 7-9 months of commission up-front.
- This lands in your checking account and is 1099 reported as income.
- If your client cancels within that 7-9 months, you will have been paid un-earned commissions and will owe it back.
- The carrier creates a “chargeback” – a negative balance that will be deducted from your next commission checks until it is paid back.
- If you are terminated while carrying a negative balance, you will be reported to Vector, a third-party reporting service that tracks agents who don’t resolve bad business.
- While carrying a Vector, it is difficult (if not impossible) to be appointed with new carriers.
- An agent can resolve this Vector by getting in touch with the carrier that reported them and paying that un-earned commission back.
Unfortunately, this straightforward process is not followed everywhere and it’s YOUR responsibility as an agent to understand how any new carrier you’re considering doing business with handles chargebacks.
I recently saw this post on Facebook:
Legal question I could use some advice on.
We have a few agents coming from a captive agency [later discovered to be American Income Life (AIL)] and they’re all, at the same time, getting hit with absurd Vectors. One of the Vectors is for over $37k.
For this one in particular, the agent has not worked there for 4 months and in February, he received a statement from the captive agency saying he had NO debt. The agent’s Vectors now date back to 2017.
This action from the captive agency is prohibiting agents from getting contacted and / or receiving advances on commissions. They have families and bills to pay, and their livelihoods are being put at risk.
What action can we take to allow these agents continue in this line of work?
My answer was:
American Income Life, Liberty National Life, and the Family Heritage Division of Globe Life are all similar in the way they count “agent debt”. What they do is account for the advances they’re paying as a “loan” and create an “agent account”. Think of it like a VISA card. Every advance you take racks up more and more “debt”. Then they only give you credit against that “debt” for your “earnings” off the policies you’ve sold over your tenure that paid that month (e.g. Your client pays $100 that month, you’re on 50% commission, you get credited $50 toward your “agent account”).
The good thing about this is that your 1099 is very small your first year. The bad thing about this is your “debt” balance is very high. They also then charge you interest on the “loan” they’ve given you. They also don’t do chargebacks on anything but cancel-at-issue policies (where the carrier gives the customer back their first-month’s premium) – which artificially keeps the “debt” balance high over a longer period of time.
Even worse for the agents – if they leave anytime in their first 2 years, they are NOT VESTED in ANY future commissions – INCLUDING the “unearned” first-year commissions that would “pay off” their “debt”. All unearned commissions (both first-year commissions and renewal commissions) are reverted to their Agency Owner. So that Agency Owner not only gets their commissions that would have paid their “debt” off, they also can Vector them and turn them over to collections to collect the newly created “bad debt”.
It’s all perfectly legal and the agents agree to it when they sign their Marketing Agreements – they just don’t understand what they’re agreeing to until it’s too late, in many cases, which makes it a completely unethical practice in my opinion.