Life Insurance Commissions – How Life Insurance Agents Are Paid

Life insurance agents can get paid very well for making large sales.  Did you ever wonder how your life insurance agent gets paid?  Are you concerned that they are making too much money from the products that you purchased?  Well look no further.  This is the ultimate guide to how life insurance agents make their money.

It may not come as a shock to most people that agents usually make their money from commissions for selling life insurance products.  There are also three other ways that an agent can be paid besides the commissions.  These include service fees, financing arrangements, and “other” compensation.  Read on to learn more about how life insurance agents can make money from you, the consumer.

Commissions

Commissions are based upon the size of the policy the agent is selling (measured by annual premiums) and by the type of product that is being sold.  Products such as variable universal life insurance, variable insurance, and universal life insurance usually have the highest profit margins for the life insurance company, and therefore pay out the highest commission rates the the agents.

Whole life insurance is considered the “bread and butter” product of most life insurance companies, and agents are well paid for selling a whole life insurance policy.  Usually a term life insurance policy carries the smallest commission, not just because it is the least expensive kind of life insurance for clients to purchase, but it also (usually) has small margins for the life insurance company.  Life insurance agents are not getting rich by selling term life insurance unless they are selling it in massive quantities.

There are two forms of commission payments to life insurance agents: first year commission payments and renewal commission payments.

First Year Commission Payment

The first year commission payment is a payment that is equal to a percentage of the total annual premium payment that will be made on the policy during the first policy year.  Usually, the rates that agents are paid are equal to something between 40% and 90% (depending upon the company and product) of the premium paid during the first year.

Even if the owner of the contract is not making the payment in a lump sum (for instance monthly or quarterly payments were chosen), the life insurance company will  sometimes calculate the agent’s commission based upon the expected first year premiums and pay the agent all the money upfront.  This is known as an annualized commission calculation.  Sometimes this is only done for relatively new agents (i.e. during the first 3 years of employment) as a benefit to them.  Some companies may only do this when the premium is set up on an automatic payment, known as a pre-authorized check (PAC).   If the client cancels the policy before the first year is over then they company will readjust the agents commissions afterwards for any unpaid scheduled premiums due during the first year.

Other times  the company may pay the agent as the premium payments are received.  Some companies may give agents the option, and the percentage payout may be slightly higher for those who choose to get paid as the money is received.

Example

For an example, let’s say that the agent is paid a 60% rate of commission on a whole life insurance product with first year premiums due of $4,000 (or about $333 per month).  The agent would receive 60% of the $4,000, which equals $2,400 of commission.  This is paid to the agent as a lump sum as soon as the first premium payment is made if it is an annualized commission.

If the client is making a monthly premium payment of $333 and the agent gets paid as the money comes in, they will receive 60% x $333 or about $200 each time a monthly payment is made during the first policy year.  A commission on term insurance would be calculated similarly to whole life, except most companies have a different percentage of premiums paid as a commission for whole life and term.

For universal products the commission calculation is a bit more complicated.  Based upon a number of factors including the face amount, a target premium is set.  The agent is paid a percentage of the total premiums up to the target premium, and for additional payments over the target premium the agent will receive a much lower percentage.  Universal and variable universal policies have such a radically different commission structure from whole life and term because they have a flexible premium schedule.

Let’s say a client has a universal life insurance policy with a target premium of $100 per month ($1,200 per year), and the agent gets paid as the premium is received by the insurance company at a rate of 70% during the first year up to target premium amount.  For payments made over the target premium the agent receives 20%.  Each payment of $100 by the client results in $70 being paid to the agent.

If during the last month of the first policy year the client has made all of the premium payments (total payments to date $1,200) but they decide that they have some extra money and they would like to add another $500 into the policy, this is entirely over the target premium amount.  The additional $500 results in a commission of $500 x 20% which equal $100.  For this year, the agent would have received $70 x 12 for the scheduled premiums, and $100 for the additional premium, for a total commission of $940.

The first year commission is where most agents receive the bulk of their total pay.  The commissions that agents receive after the first year is over are significantly lower.  These are known as renewal commissions.

Renewal Commissions

A renewal commission is a commission paid for a specific number of years after the first policy year.  The amount of years after the first year that a renewal is paid varies by company, but it is usually a significant number of years.  The commission paid on a renewal is usually in the range of about 2% to 5% of premiums paid into the policy during those specified years, but it can be higher depending upon the commission structure of the company.

Commissions for renewals are not usually annualized, and are paid as the premium is remitted to the life insurance company.  Even though the commissions are significant less for renewals than during the first year, they do serve an important purpose from the life insurance companies standpoint.  They:

• Provide the agent with on-going compensation (good for keeping agents happy).
• Serve as payment to agents for the ongoing service that life insurance policies require.
• Reward an agent for persistent (long lasting) business.  Persistent business is good for life insurance companies (lower commissions and lower processing costs for underwriting, new policies, setting up client profiles, ect.)
• Reward agents and give them an incentive for being loyal to the company.
• Can provide an agent with retirement income if the commission is vested (still paid even after they leave the company).

Even though an individual renewal commission does not usually amount to a lot of money, the total renewals of an agents book of business can become a good source of income for the agent.  The renewals reward the agent for bringing in loyal clients, and for the agents loyalty to the company.

Renewal commissions can be either vested, nonvested, or conditionally vested.  As discussed above a vested commission is one that will be paid even if the agent leaves the company.  A nonvested commission will not be paid if the agent no longer has a contract with the company.  A conditionally vested commission is a renewal commission that starts out as nonvested, but after the agent has been with the company for a certain amount of years or when the agent attains a certain age it becomes fully vested.

Vesting gives an agent an equity stake in the business that he/she generates, and adds an important element of income to his salary.  All other factors being equal, the earlier renewal commissions vest and the greater amount of vesting that an agent has, the better the compensation package is.  Vested renewal commissions may even carry over after an agent passes away; the income stream provides another level of financial protection to his or her family in addition to other assets and whatever life insurance they may already own.

Typical Commission Structures

Insurance companies classify commission structures into one of three categories.  The three classification for commission structures are:

1. Heaped commission structure– the heaped commission structure what most companies use for individual life insurance.  This is the structure when the commissions on first year premiums are very high, and the renewal premiums are much lower.
2. Level commission structure– the level structure provides the exact same commission during the first year and renewal commission periods.  This is a more common structure with group life insurance (insurance sold or provided through an employer to employees).
3. Levelized commission structure– This is when a higher percentage is paid as commission on the first year premiums than on the renewals, but the difference between the two is much less severe than the heaped commission structure.  This is also most common with group life products.

As you can probably tell the heaped commission structure is meant to reward agents for making many sales by providing a strong incentive for bringing in new clients.  The level and levelized structures reward an agent for having longevity with their existing clients.  Those structures make it strongly in the interest of the agent to keep their existing business because a renewal can not be paid on a lapse policy.  Almost all of the time if you bought your life insurance as an individual from an agent your agent will be paid on the heaped commission structure.

Service Fees

Service fees are another way that agents are paid.  These are very similar to renewal commissions, except that they are usually offered to agents at a lower rate.  A service fee is a percentage of the additional premium payments (usually about 1% or 2% of premiums paid) which are paid to agents after there are no more renewal commissions as an incentive to maintain service on the existing policy.  Sometimes the renewal commissions transfer to a service fee after the policy becomes very old, or sometimes the writing agent (the agent who initially sold the policy) no longer has a contract with the life insurance company and the policy is assigned to a “servicing agent”.

It is the servicing agents job to continue to provide guidance and service to the policy owner.  The servicing fee is meant to provide an incentive for them to do this.  From a life insurance company’s perspective this fee prevents servicing agents from ignoring the client’s service requests and helps maintain long lasting relationships with clients.  For a servicing agent it is a way to be compensated for the occasional service work that may accompany an old policy.

Servicing fees do not usually make up a large portion of an agent’s total compensation.  Some agent’s may seek what are known as “orphaned policies or orphaned clients” (client or policies whose agent has left the company) even though they are not paid highly from the service fees.  This gives the agent the opportunity to sell new business to the client who has already purchased from the company, increasing the agents odds of making another sale.

If you are assigned a servicing agent from your life insurance company he is not being paid much money from the life insurance company in service fees.  He may want to speak with you about your current life insurance and financial plan in order to sell additional products.

Financing Arrangements

Financing arrangements are a third way that life insurance agents are compensated.  Financing arrangement usually happen during the first few years of the agents employment.  They are meant to subsidize the amount of money that an agent makes from commissions while the new agents build their book of business to a sustainable level of income.  Financing arrangements usually give way to an agent earning money solely off of commissions after the first 3 or 4 years of employment have passed.  The financing arrangements are solely a bridge to provide new agents with a stable monthly income until they earn enough from commission on a regular basis.

Financing arrangements can take the form of advances, which is like a loan made by the life insurance company to the agent in anticipation of future commissions.  Advances must be paid back, and usually are paid back through future commissions earned.  If an agent leaves the company, the advance must still be repaid in full in most cases.

Some companies also provide a subsidy plan to agents.  This is meant to insure that an agent’s income never falls below a certain level.  A company could set an income floor of $3,000 for instance.  If during the month the agent only generates $2,300 of income from commissions, the insurance company would pay the additional $700 to meet the subsidy floor.

Companies may also provide new agents with a salary.  This is very similar to a subsidy plan.  A salary is usually a set minimum income, but the life insurance company does not pay any commissions to the agent unless their total commissions surpass the salary.  Usually the commissions paid in excess of a salary are at a reduced rate of an agent who is not paid a salary for the same company.

Agents are often put under stress from their financial arrangements because they are either required to pay the money back, or are required to perform a high amount of certain business related activities such as making cold calls, setting appointments, or attending training and meetings.  The requirements for the agents to receiving financing and to maintain employment with the company are set out in what is known as the validation schedule.

Other Compensation

There are four other miscellaneous ways in which agents are compensated.  These include:

• Bonuses– Bonuses may be paid if the agent reaches certain sales goals, or maintains employment with the company for a certain number of years, or even maintains a certain level of commission payments for a long period of time.  The bonus thresholds are laid out for agents in what is known as the bonus compensation schedule.
• Benefits– Just like any employee, agents may receive benefits either paid for or provided at a reduced rate.  These can include profit sharing plans, insurance coverage, and retirement plans.  Benefits form an important piece of an agent’s total compensation.
• Expense Allowances–  Some companies will pay for certain expenses for their agents such as for new computer equipment, advertising, or office space.
• Support Service– Life insurance companies provide support service such as administrative staff, secretaries, national service lines for clients, and basic office equipment such as photocopiers and printers.  While often overlooked, the support service adds a lot of value to an agents business.

How Much Does the Average Agent Make?

There really is no “average” agent.  Most agents do not make enough money to last more than 3 years in the business.  Of those who do survive, most make enough to provide for a middle to upper middle class income.  It is rare for a life insurance agent to make more than $200,000 per year, though some do.  Each major company may have a very small handful of agents who earn more than $1,000,0000 per year.  These agents are usually writing large group corporate policies, or work with extremely high net worth individuals (i.e. hedge fund managers or CEO’s).  Most career life insurance agents may be observed to be “comfortable”, but very few are “wealthy.

If it is any comfort, life insurance commissions, premiums, and marketing practices are all subject to oversight from each State’s insurance regulators.  While agents are certainly being paid to sell you a life insurance policy, they are not being paid exorbitantly.