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 types of insurance, including health insurance, homeowner insurance, accident insurance, life insurance, and annuities.

Key Takeaways

  • 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.
  • A broker understands the client’s situation, needs and requirements of the clients to find them the best insurance policy within their budget.
  • The broker also helps determine if policies should be changed, assists with compliance, and helps to submit claims and receiving benefits.

Commissions and Fees

The primary way an insurance broker earns money is commissions and fees based on insurance policies sold. These commissions are typically a percentage based on the amount of annual premium the policy is sold for. An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, life, and others.

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 the premium 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 levels of liquidity and returns, but they are required to maintain a certain level of liquidity. State insurance regulators set the number of liquid assets required 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 life of the policy.

Looking out for Clients' Best Interests

The broker is supposed to represent his clients' best interests. Part of the broker's duty is to understand the situation, needs and requirements of the clients to find them the best insurance policy within their budget. Choosing the right insurance plan is quite complicated, and studies show that many people end up choosing a less than optimal plan when they solely rely on their own judgment.

In addition to being well-versed on offerings from all insurance companies, brokers should not show favoritism towards any specific company. For this reason, brokers are paid a commission, rather than receiving payment from insurance companies, which could create negative incentives that damage trust between the broker and 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. The broker provides consulting services to help determine whether policies should be changed, provide assistance with compliance, and help with submitting claims and receiving benefits.

Insurance Regulation

To stay up to date with changing regulations and ensure they are continuing to meet their duties, brokers are licensed by the state insurance regulatory agencies. This license must be renewed on a biannual basis in most states. The insurance brokers' job only begins after the policy is sold. They must regularly meet with their clients and determine that their current policies are meeting the clients' needs.