How Do Life Insurance Agents Get Paid?

In this article...
  • Find out how life insurance agents get paid. Get the facts about agent compensation so that you can make an informed decision when selecting a policy.

A life insurance policy provides financial protection for your family, ensuring that they have the money needed to cover the expense of cremation or burial and to pay off debts that are owed. Because all financial situations are different, no one-size-fits-all life insurance policy exists, so you must rely on a life insurance agent to help you find the right policy for your needs. Understanding how life insurance agents are paid lets you spot signs that an agent may be acting in their best interest rather than yours.

How Do Life Insurance Agents Get Paid?

Most life insurance agents are paid strictly on commission. With this pay structure, agents only make money when they sell policies. Commission, also known as a “load,” is included in the cost of a policy. You are not assessed additional fees to pay for an agent’s commission.

A small number of life insurance agents aren't paid based on a commission structure. Instead, they charge fees for their services. Normally, these agents sell "no load" policies.

How Much Does a Life Insurance Agent Make in Commission?

The specific amount of commission that an agent makes selling life insurance depends on a variety of factors, including:

  • Geographic location
  • What insure company the agent represents
  • What types of policies they sell
  • Performance, as top-selling agents may earn higher commission

Generally, agents make two types of commission when selling life insurance policies:

  • Initial Premium. In exchange for the coverage provided by life insurance, you pay a monthly premium. Agents usually receive a percentage of the premiums you pay for a certain period, often the first year of a policy. Typically, the commission is about 50%.
  • For certain types of policies, insurance agents may continue to receive a small amount of commission on the premiums paid each year. Often, insurance companies limit the number of years that the commission is paid. Sometimes, renewal commissions are referred to as residuals.

How Commissions Affect Agents and Clients

The purpose of a commission-only pay structure is to give insurance agents an incentive to sell policies. Unfortunately, the pressure to make sales frequently leads to agent burnout. Insurance agents are pressed to find customers, and generally, because only a high school diploma is needed to become an agent, competition for clients is fierce. Many insurance agents end up leaving the industry or moving from agency to agency due to the challenges of making commissions. An article published in Insurance Journal reveals that the insurance industry had a 10% turnover rate, as of 2019.

Even though agents are highly motivated to sell you life insurance, they must put your interests before their own. The National Association of Insurance Commissioners has put together a list of suitability and best interest standards that life insurance agents must follow. An agent found guilty of putting their commission before the best interest of the customer will lose their license and even face legal consequences.

Considering Commissions When Shopping for Life Insurance

Knowing how commission payments vary for various types of life insurance policies can help you better weigh your options. 

Term Life Insurance

A term life insurance policy is in effect for a specific period of time known as the term. Premiums for term life are often low. For life insurance agents, term policies usually mean lower commission and little to no renewal commission.

Whole Life Insurance

Whole life insurance policies that include a savings component usually have the highest premiums, so agents tend to make more commission when they sell them. Because whole life insurance policies remain in effect for a person's entire lifespan, they are also likely to involve renewal commission.

Blended Life Insurance

A blended life insurance plan combines features of both whole life insurance and term life insurance. Commission for these policies falls in the middle and may be recommended when clients are dissatisfied with the higher premiums.

Many factors influence what type of life insurance policy is right for you, including:

  • Your age
  • Your monthly budgets
  • Whether you have any other savings
  • The amount of time you need insurance

Your life insurance agent should ask questions to establish your needs and clearly explain the benefits and drawbacks of term, blended and whole life insurance policies based on the information gathered. Keep in mind that a whole life insurance policy may be the right choice for your needs even though the life insurance agent will likely make more commission selling whole life.

What You Need to Know About Commission on Annuities

Annuities are investments sold through life insurance companies. As with life insurance policies, annuities pay commission to insurance agents. Commission amounts vary greatly depending on the type of annuity sold:

  • Fixed annuities give the owner a fixed income, making even payments every year for a set period. Generally, this type of annuity pays the lowest commission.
  • Variable annuities pay out varying amounts based on how different investments included in the policies perform. A variable annuity may be tied to stocks, bonds, mutual funds or a combination of investments. Normally, an insurance agent receives a commission equivalent to roughly 5% of the amount invested in the annuity.
  • Equity-indexed annuities also pay varying amounts, but they are tied to the performance of how a certain benchmark, such as the S&P 500 Composite Stock Price Index, performs. Insurance agents make the highest commission on these annuities because they are the most complex and profitable.

All annuities have some amount of risk with variable and equity-indexed annuities carrying more risk than fixed options. You're usually charged fees for setting up the annuity as well. Due to their complexity, variable and equity-indexed annuities typically come with the highest fees. The combination of fees and commissions makes variable and equity-indexed annuities more advantageous for insurance agents to sell, making it important that you do your own research before investing.

Do Life Insurance Agents Make Good Money?

The median average annual salary for life insurance agents in the United States was $52,180 in May 2020, according to the U.S. Bureau of Labor and Statistics. Agents may receive bonuses on top of their commission-based annual salaries if their agencies meet various goals on a monthly, quarterly or annual basis. Many life insurance agents work as independent contractors, meaning they do not receive an employee benefits package from their employers.

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