Secrets of the Life Insurance Industry: How Life Insurance Agents Get Paid – Guest Post
If you’re like me, and have ever bought any big ticket items like a car, you probably wondered how much commission the salesman made and if you got the best deal. It’s very common for people to wonder how much commission life insurance agents make, but often times this is not a topic life insurance agents want to discuss with their clients.
Because commissions for life insurance agents are fairly high, agents often do not want to reveal what they are making on a policy. For example when I started in this industry I was told that if a client asks me how much commission I made, I should answer the question like this “Mr. Client, over the 30 years that you will have this policy, I will earn less than one-half of 1 percent of what you pay in premiums”. Well, doesn’t that sound confusing? It basically doesn’t tell the client anything, which is what that answer is designed to do. In this blog, I will break down for you how life insurance agents make money.
The good thing about the life insurance industry is that unlike the auto industry, the price you pay for a policy isn’t an arbitrary number that can be negotiated. Pricing for a policy is determined by the insurance company based on your age, and health status. You can feel comfortable that if an agent quotes you a premium for a policy, he can’t increase the price to increase his/her commission.
Who Pays the Agent?
Insurance agents are paid a commission from the life insurance company based on the premium that you pay in the first year. Typically agents make anywhere between 55%-100% of the premium you pay in the first year only. That means if you buy an insurance policy that costs $1,000 a year, the agent likely made between $500-$1000 for selling that policy. On the other hand, if you purchase a whole life policy that costs $10,000 a year, your agent is probably making at least $5,000. The higher the premium, the greater the commission the agent makes. While these commissions do sound very high, the reason why they are so high is that typically insurance is a product that people keep for many years, which affords the insurance companies the ability to pay a large commission in the first year. In addition life insurance is one of the most difficult products to sell – imagine selling something that costs $1,000 a year and the person buying can’t feel it, touch it, or hold it.
What does this mean for you?
Understanding how a life insurance agent gets paid is worthwhile knowledge for you to have. If you are shopping for insurance ask the agent what their commission is. They should have no problem telling you. If your agent recommends a whole life policy with a premium of $10,000 a year, it doesn’t necessarily mean that your agent is a crook, it could be that based on your situation that policy is the right one for you. Use your gut instinct to see if you feel like your agent is pushing you towards a higher premium policy. If he is, than chances are it is due to his commission payment, and you will know to find someone else.
When buying life insurance the more information you have the better. I recommend working with an independent agent that has access to many companies and can shop the marketplace for you for the best prices. Ultimately if you feel like you’re doing business with a used car salesman run the other way, on the other hand if the agent takes the time to answer your questions, and provides complete transparency you will likely feel more comfortable and do business with them.
Liran Hirschkorn is an insurance agent and founder of ChooseTerm.com where he helps people find the best rates for life insurance online.