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How Do Life Insurance Agents Make Money?

Written by Aaron Pinkston, Tue, Nov 10 2009

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Most people know that insurance agents make money from commissions. But how does that work? Where does the money come from? And what does that mean to you?

Working on commission means that insurance agents make a certain amount of money each time they sale a life insurance policy. In some industries, this might be a flat fee per sale, but in insurance it is usually a percentage of the commissionable premium. To make this article simple, I’ll just say that the commissionable premium is the amount the policy holder pays over the course of a single year, but there are exceptions to the rule.

Some insurance agents make a significantly larger percentage than others. Some make a much lower percentage than their colleagues. In either case, the amount the life insurance company is willing to pay the agent should not impact your insurance buying decision. Those who make a large percentage typically make lots of sales and have no other support or ties to the insurance companies. Those agents who do not make nearly as much per sale typically have infrastructure, support, and tools given to them or paid for by their insurance agency.

Commission comes from you

The money insurance agents make comes from the premiums you pay, in one form or another. You pay the insurance company, and part of their expenses includes paying the insurance agent commission for selling the policy. It might be interesting to note that most life insurance companies actually loose money for the first few years because of all the expenses associated with issuing a new policy. Not the least of which are the reserves they have to set aside to pay their expected claims.

Does that mean that non-commissioned or low-commission life policies are a better deal for you? Not necessarily. Stepping away from theory for a minute, the reality is that many fully-commissioned life policies are sometimes more competitive than their counterparts. This may be due to lower re-insurance costs, lower administrative costs, or lower fixed distribution costs. What ever the reason, it often pays to compare all types of life insurance on an easy to understand level playing field.

Commission and objective advice conflict

Something you should be aware of is the advice of insurance agents. Because they make money based on sales, not advice, their advice may contain conflicts of interest. Let’s suppose you call up some place you found online that says they will compare a few life companies for you. “Don’t worry about our fee,” they say, “the life insurance companies pay for that.”

Maybe. But their advice about which company to pick – or even the companies they choose to represent – may be affected by what that fee is. If that is the case, you would be wise to consider other options.

Not all agents are like this, and I certainly do not believe there are many agents who consciously modify their advice because of the money they make. But it is important for you to choose from among your options with objectivity.

Choosing is easy when choices are clear

There is one place that let’s agents from different perspectives compete for you without you having to think about their conflicts of interest. You do not have to worry about insurance agents modifying their advice because of how they get paid because they are in competition with each other every day. They want to put their best quote in front of you, regardless of how they get paid. That sounds like my kind of place.

Choosing the best life quote from among these is easy because you do not have to worry about mixed messages, confusing jargon, or sales pressure. In the end, nobody cares how much life insurance agents make – as long as you can find the best life insurance quote for you. There’s just one way to start your customized life insurance quotes to choose from multiple agents without any sales pressure today.