How do Insurance Commissions Work?

Most agents are paid on commission, which is not surprising given the fact that most policies are sold, not bought. Commissions can be hefty; depending on the type of insurance, fees can be up to 50 percent of first-year premiums, falling to 3 to 5 percent over time thereafter.

Commissions also depend on the quality of the insurer. A high-quality company does not pay as much in commission as one that is in tougher financial straits, because the good company's high ratings make its products easier to sell. (Commission structure is why the low-load and fee-only advisor options were able to gain a foothold in the industry.)

The differences between one company and the next are so minimal that good agents will simply bring you the best available policies; they aren't likely to gouge on commissions if it puts their reputation at risk.

What's good about the commission structure in insurance is that you can easily make side-by-side comparisons to see if one deal works best.
Say an agent shows you two life policies charging, say, $200 per month in premiums; both policies offer virtually identical coverage and are sufficient for your needs. If the price is identical, the commission becomes irrelevant, at which point your sole deciding factor will be the quality or service reputations of the insurers.
By Chuck Jaffe
Chuck Jaffe is a senior columnist and host of two weekly podcasts at MarkWatch. He has also been a guest speaker on several television and radio shows.

Copyrighted 2016. Content published with author's permission.

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