How Do Insurance Agents Get Paid? (& Why You Should Know)

Do you know how your doctor gets paid every time he treats you? If you have health insurance, it goes without saying that your insurance company will pay most of the cost of your visit, along with your deductible and copay. this is a model that everyone is used to; it’s quite simple.

But what if you find out that drug companies also pay your doctor a commission every time they write a prescription? Do you think that could influence the treatment that was recommended to you? Do you want to know if this was the case?

Reading: How do health insurance agents get paid

If 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 that advice to be in our best interest, not theirs.

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

Let’s pull back the curtain and see how insurance agents have been paid historically, how it’s evolving, and why you need to know (hint: it’ll save you a lot of money in the long run).

captive agents versus independent agents
How much commission do insurance agents earn?
how insurtech is reshaping insurance
is an insurance buyers market

Perhaps the most important determining factor of how an insurance agent is paid is the type of contract they have with the insurance company they represent. These contracts are very different from each other and have a direct impact on the prices she pays for the insurance products she buys.

captive agents

Captive agents (also known as “career agents”) are best described as agents who represent a single insurance company. Many of the insurance companies you are 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 attract new customers and retain existing ones.

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

With so many non-captive insurance companies, why would an agent build their career around just one company? These are some of the benefits that companies use to recruit captive agents:

training salary
advertising (potential sales)
employee benefits (health, life, retirement)
office space
support staff
continuous training
production incentives and rewards
agency camaraderie

These are great benefits for salespeople in any career, and have 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 customer?

There’s an old saying that “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 a product, he has to make it solve your problem if he wants to sell it and feed his family.

independent agents

Independent agents are not restricted to representing a company and do not receive a compensation plan and benefits that imply an employer/employee relationship. They often represent multiple insurance companies on a direct commission basis. many independent agents began their careers as captive agents and eventually left the agency system to open their own offices and receive higher commission rates from insurers that did not need to pay for their benefits.

Financial gurus tout the independent agent model as the way you should buy your insurance. they believe agents representing multiple companies can individualize policy recommendations to meet their needs rather than trying to tailor a product.

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

Curious about what percentage of your premium goes to your insurance agent’s commission? you are not the only one.

Each 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 each time you make a premium payment during the first twelve months of the policy. The commission percentage an agent earns differs by product. Property and casualty products, such as auto and homeowners insurance, typically pay an agent between 5% and 20% first-year commissions.

Life and disability insurance products can pay agents between 50% and 100%, depending on the insurance company and whether the agent is captive or independent.

For example, suppose you purchase a whole life insurance policy from Mary, a captive agent, with an annual premium of $1,000. A standard captive agent contract will generally pay the agent a 50% first year commission; So, Maria would earn $500 from this sale.

but, if you bought the same policy from an independent agent, you could earn as much as the full $1,000 of the first year’s premium you paid. Why so much difference in salary? remember, the captive agent also gets benefits, office space, bonuses, etc., while the independent agent pays all of their own expenses.

renewal fees

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

It may not sound like a lot of money, but many agents who have built a client base steadily over a period of years earn substantial income just from their renewal income, which can continue for years after an agent leaves. to actively solicit new business. .

insurtech has been around since 2010, but it is still an unknown term for many. is short for “insurance technology” and refers to technology designed to improve the operations of the insurance industry. The bottom line: It exists to make it easy for you to find and buy the most innovative insurance products in the most consumer-friendly way possible.

Have you seen the commercials starring a happy car shopper who bypassed the painful process of dealing with a car salesman and dealership by buying a car online and having it delivered to his doorstep? Would you like to contract your insurance in the same way?

It is very likely that you answered “yes” to that question. There’s an old joke that the quickest way to clear a room is to loudly proclaim that you’re a life insurance agent. some people may laugh at that because they have dealt with aggressive, commission-driven agents who were clearly not operating in their best interest.

There will likely always be captive and independent insurance agents to accommodate buyers who want to have in-person contact with an agent, but given the choice, more and more people are choosing to shop for insurance through the comfort of their home. phone or computer, whenever and wherever they want.

Insurers offering everything from homeowners to disability insurance trust it. According to forrester research, insurtech funding topped $15 billion in the first three quarters of 2021, and there’s no sign of slowing down.

Today’s insurance shoppers can use an app on their phone, notebook or computer to connect with a company that employs licensed, salaried customer service agents who can provide quotes, answer questions and help them through the process of request; no more pressure. of direct commission agents who need to make a sale to reach their monthly quota.

[ related: what is insurtech? the future of insurance, explained ]

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

If you’re comfortable shopping for consumer goods online, you’ll make a good online insurance purchase. Buying a critical illness insurance policy or long-term disability insurance policy can now be done effortlessly over a latte at your favorite cafe, and it’s far less stressful than having an insurance agent hunched over the table. of your kitchen.

The information and content provided in this document is for educational purposes only and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. brisa does not guarantee the accuracy, completeness, reliability, or usefulness of any testimonials, opinions, advice, product or service offerings, or other information provided here by third parties. individuals are encouraged to seek the advice of their own tax or legal advisor.