If you've ever talked to a life insurance agent, you may have been told that taking out a bigger policy— or investing in an annuity — was the key to financial peace of mind. Before you move forward with this kind of advice, be aware that the agent has incentives for selling you certain types of policies. Afterall, the larger policy you purchase, the more money they will make.
Consider first consulting a financial advisor, who can provide you with guidance on your specific financial situation, including how much life insurance you may need.
- Many life insurance agents receive sales commissions for the products or services they sell.
- Agents will receive a large upfront commission based on the cost of the first year's policy premium.
- The upfront commission can be a substantial percentage of the first year's policy cost.
- Insurance agents will also receive ongoing or residual commissions each year the policy is in force.
- Annuities also pay significant commissions based on the upfront value of the annuity contract.
Most professionals who sell insurance are paid largely on a commission basis. In fact, most agents aren't even employees of the carrier. More often than not, they're independent contractors who are compensated based on how much they sell, with higher commissions for certain types of products.
This doesn't necessarily mean they're giving advice that doesn't fit your financial needs. Regulations require agents to offer life insurance policies that meet certain suitability standards. A consumer can file a complaint if they find out that the coverage they purchased and that was recommended to them was inappropriate for their financial situation.
Significant Motivation to Sell
Agents are motivated to sell as much as they reasonably can. Whenever agents or brokers sell a life insurance policy, they typically take more than half of the first year’s premium. That can amount to hundreds or even thousands of dollars, depending on the size of the policy.
They often also receive renewal commissions, which can amount to as much as 7.5% of premiums for the next nine years that you keep the policy. Beyond that, some policies give the agent a small "persistency" fee annually, also known as a residual.
Some insurance carriers are beginning to do away with renewal commissions on term life insurance policies, the most basic type of life insurance product. Term life insurance is much more affordable because it only lasts a set term and includes no cash value component.
So, sales reps may try to push a whole life policy, which is life insurance that lasts until the policyholder's death and includes a tax-advantaged cash value savings component.
Whole life coverage is more expensive, leading to more commission income for the agent. Consult with a financial advisor to determine whether buying term or whole life insurance is ideal for your situation, or if you should turn to other options like investing in securities or an annuity.
Convertible Life Insurance
When customers balk at the cost of a whole life plan, some agents may suggest convertible life insurance, which is a "blended" policy, essentially a hybrid of whole life and term insurance products. It allows you to convert a term life insurance policy to a whole policy at a later date.
Agents get a smaller commission on a convertible policy compared to a conventional whole life policy, but more than they would if you bought a term plan.
Typically, customers don't pay any more or less when they buy directly from a carrier or through a broker. The brokerage will split its commission with the life insurance agent, but the total amount of remuneration remains the same. So, if you value the personal service of a broker, you won't have to pay more to use one.
How Annuities Pay Agents
With more life insurance companies selling a variety of financial products, agents often earn even more when they sell annuities. The fixed annuity, which pays the owner a set amount each year, is still the bread-and-butter of the industry. But many reps offer products that are more complex and often pay significantly higher commissions.
For example, a variable annuity offers a cash-balance feature where the payout depends in part on the performance of different stocks, bonds, and mutual funds selected by the owner. These policies can garner commissions of 5% of the invested amount, split roughly equally between the carrier and the selling agent.
With a variable annuity, the investor is frequently charges 2.3% of the account balance in annual fees—well above most mutual-fund expense ratios—and steep surrender charges of 6% to 8%.
Another financial product with relative complexity is the equity-indexed annuity. The returns on these annuities are based on how well a benchmark such as the S&P 500 performs. In addition to being fairly complex, these products have caught flak for paying agents very generously. Sellers typically receive more than 5% commissions each time they sell one.
That doesn't mean most life insurance reps make massive incomes. According to the Bureau of Labor Statistics, the 2020 median salary for insurance agents was $52,180. The first several years of developing a customer base can be particularly challenging. Still, experts say that understanding the industry's payment model can help consumers appreciate why some agents may have a bias toward certain products over others.
What Are the Guidelines on a Typical Insurance Sales Commission?
Agents or brokers typically take more than half of the first year’s premium on the sale of a policy. That can amount to hundreds or even thousands of dollars, depending on the policy size. They often also receive renewal commissions, which can amount to as much as 7.5% of premiums for the next nine years that you keep the policy. Beyond that, some policies give the agent a small "persistency" fee annually, also known as a residual.
What Are the Inherent Difficulties of a Job in Insurance Sales?
Agents are said to often burn out within a year because of the pressure to generate a minimum amount of sales. The field may also be saturated because no college diploma is required. Also, finding qualified customers is notoriously difficult. These may be among the reasons agents are paid high commissions.
What Should Buyers Be on the Lookout for With Respect to Annuities?
Annuities typically generate higher commissions than other insurance products. While the fixed annuity remains the industry mainstay, many reps offer products that are more complex and often pay significantly higher commissions. A variable annuity might garner commissions of 5% of the invested amount, split roughly equally between the carrier and the selling agent.
The Bottom Line
When you're comparing different products, ask the agent or broker how much commission they make on each one. If they refuse to tell you, you might want to find someone who will. And, of course, shop around for quotes from several sources before buying any product.