An insurance broker is a professional who acts as an intermediary between a consumer and an insurance company, helping the former find a policy that best suits their needs. Insurance brokers represent consumers, not insurance companies; therefore, they can't bind coverage on behalf of the insurer. That's the role of insurance agents, who represent insurance companies and can complete insurance sales.
An insurance broker makes money off commissions from selling insurance to individuals or businesses. Most commissions are between 2% and 8% of premiums, depending on state regulations. Brokers sell all insurance types, including health insurance, homeowner insurance, accident insurance, life insurance, and annuities.
- When you hire an insurance broker, they work directly for you.
- An insurance agent, on the other hand, usually works on behalf of an insurance company.
- Purchasing insurance can be complex, and an insurance broker does all the research for their client to help them choose a policy.
- An insurance broker cannot close a deal on a policy, only an agent or an insurance company.
- Insurance brokers need a state license to practice.
How Insurance Brokers Make Money
The primary way an insurance broker makes money is from commissions and fees earned on sold policies. These commissions are typically a percentage of the policy's total annual premium. An insurance premium is the amount of money an individual or business pays for an insurance policy.
Once earned, the premium is income for the insurance company. It also represents a liability as the insurer must provide coverage for claims being made against the policy. Insurers use premiums to cover liabilities associated with the policies they underwrite. They may also invest in premiums to generate higher returns and offset some of the costs of providing the insurance coverage, which can help an insurer keep prices competitive.
Insurers invest the premiums in assets with varying liquidity and return levels, but they are required to maintain a certain level of liquidity. State insurance regulators set the number of liquid assets necessary to ensure insurers can pay claims.
An insurance broker or agent will often earn a lump sum percentage against the first-year premium of a policy that they sell and then a smaller but ongoing annual residual income payment over the policy's life.
Other Methods to Make Money
Brokers also make money by providing consultative and advisory services to clients for a fee. In certain circumstances, transactional fees can be charged. For instance, brokers can charge fees for initiating changes and helping to file claims.
States govern how and when brokers can charge fees. When permitted, the fees must meet certain criteria, such as being reasonable and agreed upon by the client and broker.
Controversially, some insurers incentivize brokers who perform well by paying bonuses or increased commissions. The compensation is often based on past performance and is used as motivation to continue certain behaviors that generate revenues.
However, because—in their clients' best interest—brokers do not represent a specific company, this method of earning commissions is often frowned upon.
The broker is employed to represent his clients' best interests. Part of the broker's duty is to understand the clients' situation, needs, and desires to find the best insurance policy within their budget. Choosing the right insurance plan can be complicated, and studies show that many people choose a less than optimal plan when they solely rely on their judgment.
Besides being well-versed on offerings from all insurance companies, brokers should not favor any specific company. As a result, brokers are paid a commission rather than receiving payment from insurance companies, which could create negative incentives that damage trust between the broker and the client.
A broker has an important responsibility to help people navigate between insurance plans, many of which have subtle differences. In addition to connecting clients to the right policy, the broker continues to have obligations to his clients.
A broker provides consultative services to help clients submit claims and receive benefits, as well as determine whether policies should be changed.
To stay up to date with changing regulations and ensure they are continuing to meet their duties, brokers are licensed by state insurance regulatory agencies. Their license must be renewed on a biannual basis in most states. Brokers must regularly meet with their clients and review how their current policies are meeting their needs.
The number of insurance brokers and agencies in the US as of 2021.
Insurance Broker Career Path
Like insurance agents, insurance brokers need a bachelor's degree, often a background in sales or business, and strong interpersonal and research skills. Because insurance brokers must review contracts on behalf of their clients, attention to detail in contracts and comfort in analyzing terms and conditions are necessary to succeed in this career path.
Although insurance brokers can handle as many types of insurance that they are comfortable selling, becoming an expert in one may be beneficial.
Brokers must be licensed in the state where they practice and pass Series 6 and 7 FINRA-administered exams. Keeping up to date on changes in insurance laws is a good way to keep clients confident, too.
According to PayScale, as of Jan. 15, 2021, a mid-level insurance broker's median salary is approximately $70,000 a year. However, this amount will often rise as an insurance broker gains experience and gathers clients.
What Is the Difference Between an Insurance Agent and a Broker?
Brokers represent and work on behalf of consumers, and agents represent and work for insurance companies. Brokers cannot complete a sale of insurance, unlike agents.
Is It Better to Get Insurance Through a Broker?
You can't usually obtain insurance through a broker, but an insurance broker can help you find a policy that suits your needs. Once a broker has done all of their research and presented their clients with options, the policy selected must be bound by an insurance agent or company. A broker does not finalize a transaction.
What Is the Difference Between an Insurance Broker and an Insurance Company?
An insurance company sells insurance, and a broker seeks to find insurance policies best aligned to the client's needs and goals.
Is It Cheaper to Get Insurance Through a Broker?
You can't buy insurance from an insurance broker, but they can help you find the best and most affordable policy.
What Is an Insurance Broker in the U.K.?
An insurance broker in the U.K. is similar to an insurance broker in the U.S. They act as a liaison between their clients and insurance companies.