Agents make a living selling life insurance — they’re uniquely qualified to offer expert advice and guidance. However, their job is driven by incentives and commission. Learn how life insurance agents work so you can make the most informed decision about coverage.
What you should know about life insurance agents
Life insurance agents work in your best interest. But there are a few things going on behind-the-scenes that might affect their advice to you.
They usually work on commission
Most life insurance agents don’t receive a salary — they earn a commission on the products they sell.
Typically, agents pocket 30% to 90% of the premiums you pay in the first year of your policy. If you purchased term life coverage, they usually won’t see any income from you after that. But if you bought a permanent policy, your agent might continue to receive 3% to 10% of your premiums annually, known as a “trailing commission.”
Since agents stand to make the most money in the first year, they rely on new customers to boost their income. If your agent recommends that you buy a new policy without giving you a real reason why, they might be looking for a paycheck. You have the right to ask your agent to justify any policy purchase.
Do all agents work on commission?
No. Some agents work for “low load” insurers, which pay their agents a salary rather than a commission.
They receive the highest returns on permanent policies
Because agents earn a percentage of the premiums paid, they might steer you towards more expensive policies. Permanent policies — like whole life, universal life and variable life — offer lifelong coverage and build cash value over time. As a result, they have pricier premiums.
This impacts you in a couple of ways. First, commissions eat into the cash value your policy accumulates, especially in the first few years. As a result, you’ll earn less cash value than you would if you purchased a policy on your own. And second, some agents might let this bias influence their advice. If your agent promotes the cash value as the major selling point of a permanent policy, ask about the rate of return. Usually, it takes 10 to 15 years to build up enough cash value to start borrowing against your policy.
Their quotes might not match your needs
Be wary of upselling. Before you get a quote, calculate how much coverage you need based on your income, assets and financial obligations. That way, when your agent gives you an estimate of coverage, you’ll know whether it’s in the same ballpark. If the dollar figure is high, ask the agent to explain how they came to that number.
Life insurance is an expense, so you want to make sure you’re buying a policy you can afford. A general rule of thumb is to buy a policy valued at five to 10 times your annual salary — but you might need more coverage if you have financial dependents and debt, or want to leave an inheritance to your loved ones.
Types of life insurance agents
There are two types of life insurance agents: Captive and independent. Most agencies employ both, and some rely solely on captive agents to sell their products. While both types of agents can offer you guidance and expert knowledge, there are a few key differences between the two.
Captive agents
Captive agents work for a single life insurance company, which means they’re limited to that provider’s products. For example, a captive agent for Prudential will only sell you Prudential policies, and they earn life insurance commissions set by the insurer.
These agents know their products inside and out. But they usually have quotas to meet. Consider this if an agent pushes you to buy a certain amount of coverage, or to bundle your life insurance with other types of insurance from the same company.
Independent agents
Independent agents sell policies from a range of insurers, and create an income based on commissions and bonuses from those carriers. While independent agents could offer you a range of quotes, they might promote policies that pay them a higher commission. That’s why it’s worth comparing providers on your own, too.
Which agent is right for me?
It depends on how much money you want to spend, and how much time you have to research. If you want your agent to do the legwork, an independent agent provides you with quotes from multiple companies. By giving you options, they might also save you money.
But if you’ve already compared insurers and know which one you want to go with, it might be quicker to go with a captive agent.
Factors that affect how much a life insurance agent makes
Aside from their commission, the amount of money a life insurance agent can make is dependent on these factors:
The size of their client base
How many years of experience they have
The number of companies they work with
Their compensation agreement with the insurance company or employer (if they’re independent)
Whether they’re licensed to sell other financial products
Agent vs. broker
Agents represent one or more life insurance providers. They can point you towards the policy that suits your needs and budget, and help you complete your application. On the other hand, brokers work for you, and they’re not tied to a particular provider. They assess your situation, and then find you the best possible policy based on their knowledge of the industry.
Pros and cons of working with a life insurance agent
Pros
Expert advice. Agents are experts in their field, and they can help you to navigate the many providers and policies on the market.
Help with application. Most agents will assist you in completing your policy application.
Speedy approval for other policies. Many agents also sell other types of insurance — like disability — and can keep your application on file for a quicker turnaround time.
Cons
Commission-based. Ultimately, life insurance agents are salespeople. Be wary of upselling — if you buy a more expensive policy, the agent stands to make more money.
Limited options. If you work with a captive agent, you might miss out on a cheaper or better policy with another provider. It’s always a good idea to compare policies on your own, too.
Compare life insurance companies
What is direct term life insurance?
Also known as direct-to-consumer (DTC) life insurance, this is a policy you purchase directly from a life insurance agency or company — and usually online. It removes intermediaries from the purchasing process, so it doesn’t describe the coverage you’d buy through an agent or broker.
Bottom line
Agents are experts on life insurance. But most of them work on commission, and may be incentivized to sell policies that pay a higher commission. Before contacting an agent, determine your life insurance needs so you can cross-check quotes they give you.
In some states, yes. For example, agents working in New York must disclose commissions and fees they charge to clients under Regulation 194. And in Connecticut, Georgia, Hawaii, Rhode Island and Texas, agents have to disclose whether insurers pay them performance bonuses on top of commission.
If you let your policy lapse in the first year, your agent might have to pay back any commission they earned.
Speak to the insurance company directly. If that doesn’t lead to a solution, contact your state’s insurance department to investigate the issue. You can find their contact details on the National Association of Insurance Commissioners (NAIC) website.
Katia Iervasi is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in insurance. Her writing and analysis on life, disability and health insurance has been featured in The Washington Post, Forbes, Yahoo, Entrepreneur, Best Company and FT Advisor. She holds a BA in communication from Australia's Griffith University.
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