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How do insurance agents get paid? (& why you should know)

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Do you know how your doctor gets paid every time they treat you? If you have health insurance, it’s evident that your insurance company will pay the majority of the cost of your visit, along with your deductible and co-pay. This is a model that everyone’s used to; it’s pretty straightforward.

But, what if you found out that your doctor also got paid a commission by the pharmaceutical companies every time they wrote a prescription? Do you think that might influence the treatment they recommended for you? Would you want to know if this was the case?

If it were true, the scenario described above would be a blatant conflict of interest. When a medical or non-medical professional recommends that we pursue a particular remedy for a concern we have, we expect their advice to be in our best interest, not theirs.

As a consumer of insurance, what your agent recommends you purchase will depend on many factors, including the type of agent they are (captive or independent), the company or companies they represent, their success level in their career, and more.

Let’s pull back the curtain and look at how insurance agents have been paid historically, how that’s evolving, and why you need to know (hint: it will save you big money in the long run).

Captive agents vs. independent agents

Perhaps the most significant determinant of how an insurance agent gets paid is the type of contract they have with the insurance company they represent. These contracts are very different from each other, and they directly impact the prices you pay for the insurance products you buy.

Captive agents

Captive agents (also known as “career agents”) are best described as agents that represent a single insurance company. Many of the insurance companies you’re familiar with have relied on captive agents for decades to build their companies. Prudential, Metropolitan, Allstate, and State Farm are just a few household names that still rely (mostly) on captive agents to bring in new customers and retain existing customers.

Compensation plans will vary by insurer, but most companies pay their captive agents a training salary for an initial amount of time and then transition them into a 100% commission plan.

With so many insurance companies out there that aren’t captive, why would an agent build their career around a single company? These are a few of the perks companies use to recruit captive agents:

  • Training salary
  • Advertising (sales leads)
  • Employee benefits (health, life, retirement)
  • Office space
  • Support staff
  • Ongoing training
  • Production incentives and rewards
  • Agency comradery

These are great perks for salespeople in any career, and they’ve helped build the agency system for decades by bringing new agents into the insurance business. It’s healthy for their careers, but is it beneficial for you as a client?

There’s an old saying that goes, “If the only tool you have is a hammer, you’ll start treating all your problems like a nail.” Translated: if a captive agent has one product, they have to make it solve your problem if they’re going to make sales and feed their family.

Independent agents

Independent agents aren’t restricted to representing one company and don’t receive a compensation plan and benefits that construe an employer/employee relationship. They often represent multiple insurance companies on a straight commission basis. Many independent agents began their careers as captive agents and ultimately left the agency system to open their own offices and receive higher commission rates from insurers that didn’t need to pay for their benefits.

Financial gurus tout the independent agent model as the way you should purchase your insurance. They believe that agents who represent multiple companies can individualize policy recommendations to meet your needs instead of trying to make one product fit.

For example, if you just took out a 30 year-mortgage, a 30-year level term life insurance policy might be the perfect fit for you. Some captive agents will have that product, and some won’t. But, just about any independent agent can get that type of policy for you, and they can compare companies to get you the most competitive price.

How much commission do insurance agents make?

Curious what percent of your premium goes toward your insurance agent's commission? You're not the only one.

Every traditional type of agent, captive or independent, relies on commissions as their primary source of income. There are two types of commissions agents receive: first-year commissions and renewal commissions.

First-year commissions

First-year commissions are paid to the agent every time you make a premium payment during the first twelve months of the policy being in force. The commission percentage an agent earns differs by product. Property and casualty products, like auto and homeowner’s insurance, typically pay an agent first-year commissions between 5% and 20%.

Life insurance and disability insurance products can pay agents anywhere from 50% to 100%, depending upon the insurance company and whether or not the agent is captive or independent.

For example, let’s say you buy a whole life insurance policy from Mary, a captive agent, with an annual premium of $1,000. A standard captive agent contract will typically pay the agent a 50% first-year commission; so, Mary would earn $500 from this sale.

But, if you bought the same policy from an independent agent, they could earn as much as the total $1,000 first-year premium you paid. Why such a difference in pay? Remember, the captive agent is also getting benefits, office space, bonuses, etc., while the independent agent pays all of their own expenses.

Renewal commissions

Renewal commissions are paid to agents after the first year and will also vary by product and the type of contract an agent has. Using our example above, the renewal commission for a life insurance policy sold by a captive agent is typically 3% to 4% of the annual premium, which would pay Mary renewal commissions of $30 to $40 per year on your policy.

That may not seem like a lot of money, but many agents who have steadily built a client base over a period of years earn substantial incomes just from their renewal income, which can continue for years after an agent stops actively soliciting new business.

How insurtech is reshaping insurance

Insurtech has been around since 2010, but it’s still a term that’s unfamiliar to many. It’s short for “insurance technology,” and it refers to technology designed to enhance the operations of the insurance industry. Bottom line — it exists to make it easier for you to find, and buy, the most innovative insurance products in the most consumer-friendly way possible.

Have you seen the commercials that star a happy car buyer who circumvented the painful process of dealing with a car salesperson and dealership by buying a car online and having it delivered right to their doorstep? Would you like to buy your insurance the same way?

The chances are good you answered “Yes” to that question. There’s an old joke that says the quickest way to empty a room is loudly proclaim that you’re a life insurance agent. Some people can chuckle at that because they’ve dealt with pushy, commission-driven agents who were clearly not operating in their best interests.

It’s likely there will always be captive and independent insurance agents to accommodate buyers who want in-person contact with an agent, but, given a choice, more and more people prefer buying insurance through the convenience of their phone or computer, whenever and from wherever they wish.

Insurers providing every type of insurance, from homeowners to disability insurance, are banking on that. According to Forrester Research, insurtech funding topped $15 billion in the first three quarters of 2021, and there are no signs of it slowing down.

Today’s insurance buyers can use an app on their phone, pad, or computer to connect with a company that employs licensed, salaried customer support agents who can provide quotes, answer questions, and assist them through the application process — no more pressure from straight-commission agents who need to make a sale to reach their monthly quota.

[ Related: What is insurtech? The future of insurance, explained ]

It’s an insurance buyer’s market

Now that you know more about the different types of agents and how they’re paid, you can decide how you want to buy insurance instead of defaulting to the insurance industry’s standard sales model.

If you’re comfortable shopping for consumer goods online, you’ll do just fine shopping for insurance online. Buying a critical illness insurance policy or long term disability insurance policy can now be done effortlessly as you sip on a latte at your favorite café, and it’s a lot less stressful than having an insurance agent hunched over your kitchen table.

Get a free critical illness insurance quote online in seconds.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published February 10, 2022
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