Chargeback reserves: the percentage to set aside and where to keep it

Ask agents in year three what they'd tell year-one selves and the reserve comes up every time.

The rule of thumb. Set aside 20 to 25 percent of every advanced commission in a separate account. Not a mental note, an account at a different bank so it takes effort to touch.

Why that number. A typical FE book loses 15 to 25 percent of policies in the first 13 months. On a 75 percent advance, the unearned portion returned on those lapses works out to roughly that share of your advances. Better persistency, smaller reserve; telesales with weak draft-date discipline, bigger.

When to release it. Month 13 after the policy issued, if it's still in force, that policy's reserve is yours. Some agents release quarterly by cohort; some wait for the year-end statement. Either works if you're consistent.

Taxes go in a different account. The reserve is not your tax money. Quarterly estimated taxes on 1099 income are their own line, and the agent who mixes the two usually finds out in April.

What the reserve buys you. The ability to leave an IMO without a debt balance holding your contracts hostage. The ability to have a slow month without a credit card. The ability to switch to as-earned when you want to.

The failure mode. "I'll start next month." The reserve only works if it starts with the first advance.

What percentage are you actually setting aside, and has it ever saved you?