How Much Commission Does My Agent Make From My Life Insurance Purchase?

Here's what you need to know about life insurance and commissions

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Life insurance salespeople are compensated with a percentage of the policy premiums paid in the first year and each year thereafter. Some types of life insurance salespeople receive higher compensation, or “commissions,” than others.

Most states prohibit an agent from rebating commissions, but that doesn’t mean there aren’t ways to pay less money. Learn how commissions affect your insurance premium, and how to be a smarter consumer.

What Are Life Insurance Commissions?

Life insurance agents who sell policies from one company are known as “captive” insurance agents. They may receive lower commission rates because they may receive other benefits, such as retirement accounts and health insurance. Other salespeople, called “brokers,” are independent of any single company and can receive up to 50% higher commissions than captive agents.

Commissions and other expenses are built into the policy premium. No matter whom you buy from (agent or broker), the same policy from the same company has the commission built into the premium.

Some states may have regulations related to commission caps. For example, the New York State Department of Financial Services caps first-year commissions at 99% of the premium.

How Do Commissions Work?

An insurance agent’s commission percentage tends to change depending on the type of policy they’re selling: whole life, flexible premium or universal life, and term insurance.

Whole Life

Whole-life premiums generally have the highest commissions; usually, more than 100% of the first-year premium and the exact percentage may change depending on the age of the insured. So if an agent sells you a policy with a first-year premium of $3,600, it’s likely the insurance company will pay at least that much for a first-year commission.

Whole-life policies usually have at least two types of riders that can reduce the commissions in the premium you pay:

  • Term insurance rider: Term insurance 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: Cash-value riders increase a policy’s cash value in its early years. Cash-value-rider commissions are a fraction of the commissions on the base policy.

Universal Life

Any premiums that you pay in the first year up to the amount of the target premium usually have a commission of 100% or more. The agent’s commission rate decreases for any premiums you pay above the target level the first year.

Term Insurance

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

What’s the Best Policy for Me?

Life insurance provides protection for your family when you pass away, and can also be a vehicle for increasing a policy’s cash value. What’s best depends on your resources and circumstances. Here are some tips on how to be a smarter life insurance buyer.

Illustrations

Whoever is selling you life insurance should provide an illustration of values and benefits over the life of the policy. The illustration will show the:

  • Projected premium each year
  • Death benefit payable
  • Cash accumulation value, if any
  • The base or target premium
  • Any riders included on your policy

Read the illustration footnotes. They are often extensive, but contain valuable information about the premiums and benefits.

Multiple Companies

It’s good practice, especially for term insurance, to see illustrations from different companies. Term insurance is a highly competitive market, and some companies have lower premiums than others. While online calculators may be helpful for term insurance, they aren’t effective for whole-life or universal life, because there are too many potential variations.

Ask Questions

If the illustration is for whole-life or universal life, ask the agent or broker to break down the premiums for you into target or base premium, excess, and riders. If no term riders or excess premium are shown, ask to see an illustration that has them. If they are not available, ask to see a product that does have them.

Depending on what you’re trying to accomplish, the lowest premium isn’t necessarily the right answer. What you’re looking for is the most value for your premium dollar.

The Bottom Line

The commissions for life insurance products are built into the premium; they are not added onto the premium. The best way to get the most value for your premium dollar is to look carefully at the illustrations, ask for explanations about premiums and riders, and look at more than one company.

Frequently Asked Questions (FAQs)

Which states require a corporation to hold an insurance license in order to receive commissions?

Most states require an agency license for corporations to receive commissions. Iowa, Rhode Island, Tennessee, Vermont, and Wisconsin don’t.

Who is not eligible to receive commissions from the sale of an insurance product?

Generally, a state insurance license is required to receive commissions. Most states prohibit licensed agents, brokers, and insurance companies from rebating commissions.

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Article Sources

  1. New York Life Colorado. “Compensation and Benefits That Add Up,” Pages 1-2.

  2. Claro Insurance. “Captive Agent vs. Insurance Broker: Pros and Cons.”

  3. The Council of Insurance Agents and Brokers. “50-State Survey: Anti-Rebating Laws,” Page 1.

  4. New York State Department of Financial Services. “Re: Expense Allowance Limitations for Life Insurance Agents and Brokers.”

  5. Securities and Exchange Commission. “BGA Sales Agreement for Fixed and Variable Life Insurance and Annuity Products,” See Schedule II.3.

  6. Commonwealth of Massachusetts Division of Insurance. “Buying Life Insurance and Annuities in Massachusetts—Part Two.”

  7. National Association of Insurance Commissioners. “Life Insurance Illustrations.”

  8. Supportive Insurance Services. “5 Facts About Insurance Licensing for Producers and Agencies.”

  9. National Association of Insurance Commissioners. “Comm Share Survey 1-30-061.”