What Is an Insurance Broker?
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, and 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.
Understanding How Insurance Brokers Make Money
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 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.
The broker is supposed to represent his clients' best interests. Part of the broker's duty is to understand the clients' situation, needs, and requirements to find them the best insurance policy within their budget. Choosing the right insurance plan is quite 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. 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 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 consulting services to help determine whether policies should be changed, provide assistance with compliance, and help submit claims and receive benefits.
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 meet the clients' needs.
Insurance Broker Career Path
Like insurance agents, insurance brokers need a bachelor's degree, and often a background in sales or business, and have 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 is necessary to succeed in this career path.
Although insurance brokers can handle as many types of insurance that they are comfortable selling, drilling down into one type and becoming an expert may be beneficial.
Brokers must be licensed in the state where they practice and will need to study for and pass series 6 and 7 FINRA-administered exams. Keeping up to date on changes in insurance laws is a good way to keep your clients confidence, 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 gathers experience and clients. According to IBIS World, as of January 2021, there are 412,850 Insurance Brokers & Agencies Businesses in the United States.
Insurance Broker FAQs
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 really obtain insurance through a broker, but an insurance broker can help you find the best policy. 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 doesn't finalize a transaction.
What Is the Difference Between an Insurance Broker and an Insurance Company?
An insurance company sells insurance, and a broker finds you the best deal on insurance by comparing several insurance companies' policies.
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 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.