Salespeople for life insurance are paid a percentage of the policy premiums paid in the first year and each year after that. Some life insurance salespeople are compensated more generously, or "commissions," than others. Although most jurisdictions make it illegal for an agent to rebate commissions, that doesn't mean there aren't ways to save money. Learn how insurance commissions affect your rate and how to be a more informed shopper.
What is Life Insurance Commission?
Captive insurance agents are life insurance agents that only sell policies from one business. They may receive reduced commission rates because they may obtain other perks such as retirement accounts and health insurance. Other salespeople, known as "brokers," are not affiliated with any company and can earn up to 50% more commissions than captive agents. The coverage premium includes commissions and other charges. The commission is integrated into the premium of the same policy from the same business, regardless of who you buy it from (agent or broker). Some states may have laws governing commission caps. The New York State Department of Financial Services, for example, sets a limit of 99 percent of the premium for first-year commissions.How Do Commissions Work?
The commission % paid to an insurance agent varies based on the type of policy sold: whole life, flexible premium or universal life, and term insurance.Whole Life
Whole-life premiums carry the highest commissions, often more than 100% of the first-year premium, with the actual percentage varying based on the insured's age. If an agent sells you a policy with a $3,600 first-year premium, the insurance company will almost certainly pay at least that amount for a first-year commission. Whole-life insurance often includes at least two types of riders that can help you save money on commissions:- Term insurance rider: Term insurance riders add coverage to a policy at a reasonable cost, and commissions are low compared to what an agent receives on a whole-life policy.
- Cash-value riders: Cash-value riders boost the cash value of a policy in its early years. The commissions on cash-value riders are a portion of the commissions on the base policy.
Universal Life
Any premiums you pay in the first year that are less than the target premium are normally subject to a commission of 100% or more. Any premiums you pay beyond the target level in the first year reduce the agent's commission rate.Term Insurance
Term life insurance commissions are calculated as a percentage of the annual premium paid. Those commissions are almost a fraction of what a whole-life or universal policy would pay.What's the Best Policy for Me?
Life insurance protects your family if you die, and it can also be used to increase a policy's cash value. What's best for you will be determined by your resources and circumstances. Here are some pointers on how to shop for life insurance more wisely.Illustrations
Anyone selling you life insurance should show you a chart of values and benefits throughout the policy. The artwork will depict the following:- Premiums are expected each year
- Payment of a death benefit
- If there is any cash accumulation value,
- The starting point or target premium
- Any riders on your insurance policy
Multiple Companies
If the illustration is for whole life or universal life, ask the agent or broker to break down your premiums into the target or basic premium, excess, and riders. Request an illustration with them if no term riders or excess premiums are specified. If they aren't available, ask about a similar product. Depending on what you're trying to do, the lowest premium isn't necessarily the best solution. You want to get the most bang for your buck with your premium dollar.Ask Questions
If the illustration is for whole life or universal life, ask the agent or broker to break down your premiums into the target or basic premium, excess, and riders. Request an illustration with them if no term riders or excess premiums are specified. If they aren't available, ask about a similar product. Depending on what you're trying to do, the lowest premium isn't necessarily the best solution. You want to get the most bang for your buck with your premium dollar.The Bottom Line
Commissions on life insurance products are integrated into the premium rather than being placed on top of it. Looking at the illustrations attentively, asking for clarifications concerning premiums and riders, and looking at more than one company are the greatest ways to get the most value for your premium money.Frequently Asked Questions (FAQs)
To get commissions, which states require a company to have an insurance license?
For corporations to obtain commissions, most states require an agency license. Iowa, Rhode Island, Tennessee, Vermont, and Wisconsin are the only states that do not.Who isn't eligible for commissions from insurance product sales?
Receiving commissions usually necessitates the possession of a state insurance license. For licensed agents, brokers, and insurance companies, rebating commissions is illegal in most states.