Life Insurance Salesmen: How Their Commission Works

Life insurance agents are compensated through a combination of base salaries, benefits, and commissions. While some life insurance agents are paid a base salary, most of their income is earned through commissions. These commissions are typically front-loaded, ranging from 40% to 115% of the policy's first-year premiums, with renewal commissions in subsequent years falling to around 1-2%. Commissions are dependent on the type of life insurance policies sold, with whole life insurance plans often garnering the highest commission rates of over 100% of the total premiums for the first year. Term life insurance plans, on the other hand, usually pay lower commissions ranging from 30% to 80%.

Commission rates for whole life insurance

Life insurance agents make money mostly through commissions. The commission rates vary depending on the type of life insurance policies sold. Whole life insurance plans, for instance, often offer commission rates of more than 100% of the total premiums for the first year of the policy. The exact percentage depends on the age of the policyholder.

Whole life insurance policies usually have at least two types of riders that can reduce the commissions in the premium paid:

• Term insurance rider: These riders add coverage to the policy at a low cost and have relatively low commissions compared to what the agent earns from the whole-life policy.
• Cash-value riders: These riders increase a policy's cash value in its early years. The commissions for these are a fraction of the commissions on the base policy.

After the first year, insurance agents will receive additional commissions for each year the policy is renewed. These commissions are usually under 5% of the annual premium and depend on the policy type, the state the policy is being written in, and the life insurance company being represented.

Some agents stop receiving commissions after the third year of the policy. If the policyholder stops paying and lets the policy lapse within the first few years, insurers may require agents to pay back some of the money they earned in commissions.

Commission rates for universal life insurance

Life insurance agents typically receive their earnings through commissions. Commissions are calculated as a percentage of the premium paid by the policyholder. The commission structure can vary among insurance companies, and the percentage may be influenced by factors such as the type of policy, policy duration, and additional riders or features.

For universal life insurance plans, agents typically receive a commission equivalent to at least 100% of the premiums the policyholder pays in the first year up to the amount of the target premium. However, the rate decreases for any premiums the insured pays above the target level in the first year.

The commission rates for universal life insurance are significantly higher than those for term life insurance policies, which often range from 30% to 80% of the annual premiums. Universal life insurance plans offer more flexibility than term life insurance, allowing policyholders to adjust their premiums and death benefits.

While the commission rates for universal life insurance are generally high, it's important to note that they are not standardized and can vary between insurance companies. Agents negotiate commission structures with individual insurers, and rates may differ based on contractual agreements. Therefore, it's advisable to consult with a financial advisor to determine the most suitable policy for your needs and to understand the commission structure for different types of policies.

Commission rates for term life insurance

Term life insurance plans typically pay the lowest commission rates to salespeople. These rates can range from 30% to 80% of the annual premiums in the first year. In later years, the agent may receive between 3% and 10% of each year's renewals.

The commission structure for term life policies is a percentage of the premium paid each year. These commissions are likely to be several times lower than what an agent would earn from a whole-life or universal policy.

Some insurance carriers are beginning to do away with renewal commissions on term life insurance policies. Term life insurance is much more affordable because it only lasts a set term and includes no cash value component.

Captive agents, or salespeople who sell policies from one company, may receive lower commission rates because they may receive other benefits, such as retirement accounts and health insurance.

The size of the policy dramatically affects the commission rate an agent can earn. For example, if you sell a $100,000 policy and earn a 50% commission on the first year's premium, you will make $1,000 if the insured pays $2,000. If you sell a $500,000 policy and the insured pays $8,000, you will make $4,000 with the same commission rate.

Commissions for term life insurance are usually paid upfront as single, upfront payments when a policy is sold.

How independent agents are paid

Independent agents, also known as non-captive agents, represent multiple insurance companies and are paid differently from captive agents. Independent agents are compensated only through commissions on the policies they sell. They do not receive a base salary or benefits like captive agents, who work exclusively for one insurance company.

Independent agents' commissions are typically front-loaded, meaning they receive a large upfront payment that can range from 40% to 115% of the policy's first-year premiums. This amount is set by the insurance company and is subject to state commission limits. After the first year, independent agents continue to receive additional commissions, usually under 5% of the annual premium, for each year the policy is renewed. These subsequent commissions depend on the policy type, the state in which the policy is written, and the insurance company.

The commissions for independent agents selling term life policies are lower than those for whole life or universal life policies. Term life insurance commissions are often a percentage of the annual premiums, ranging from 30% to 80%. In contrast, whole life insurance commissions can exceed 100% of the first-year premium, although they may decrease if the policyholder pays premiums above the target level in the first year. Universal life insurance commissions are typically at least 100% of the premiums paid in the first year up to the target premium.

While independent agents have the freedom to represent multiple insurance companies, they often bear their own business expenses, such as rent, office supplies, and advertising costs. This arrangement provides them with the potential for higher earnings but also comes with financial responsibilities and uncertainties.

How captive agents are paid

Captive agents are insurance salespeople who work exclusively for one insurance company. They are paid by that company, usually with a combination of a base salary, commissions, and benefits. They may be full-time employees or independent contractors.

The salary structure for captive agents varies depending on the company. Some captive agents are paid a base salary plus commissions, while others may only receive commissions. If they receive a base salary, their commission percentage is typically lower. Commissions for captive agents are generally lower than those for independent agents because they also receive a salary and benefits.

Captive agents typically earn lower commissions than independent agents, who represent multiple insurance companies. However, captive agents benefit from having their startup costs, administrative tasks, and office space covered by the company. They also receive extensive support, including training, a client list, and a national advertising budget.

The average annual salary for life insurance agents ranges from $62,000 to $76,000, but it can vary widely depending on location, experience, and the type of policies sold. Captive agents have the advantage of a steady income, but their contracts may include obligations and quotas that impact how they conduct business.

Frequently asked questions