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Understanding the life insurance agent commission structure is key to knowing if a career in life insurance is worth it and how much life insurance agents are capable of making in a year. If you were wondering how life insurance agents get paid and how much they can make selling various policies, then this blog will help you with the answers.
Life insurance industry revenue stands at 945B USD and these products are offered by major insurance companies with lucrative benefits for those who insure themselves and their family members.
In times of eventuality, these policies can help families financially to pay off any loans, debts and to help them manage their expenses in the long term.
Life insurance agents are providing not just an opportunity but a service by helping clients insure themselves for the sake of their family and loved ones. In this article we explore what the role of agents are, how the commission structure works, career growth etc.
The role of life insurance agents
Although clients can now buy policies of any kind online, buying from a life insurance agent has its own benefits.
Life insurance agents provide various services to their clients and help in choosing the right plan based on client requirement. Life insurance companies have paid out 200 billion USD by 2021 to insurers and their families in the form of benefits and annuity. Life insurance agents help clients choose the specific plan that benefits them in the best way.
Owning a life insurance plan can help in financial security and also helps in cutting down on taxes that are paid to the government. Premiums paid for life insurance have certain tax deductions and an agent can help in identifying the right plan for the client that benefits them the most. As a client, purchasing from an agent helps them navigate through the numerous products available in the market and maximize the benefits.
Agents can earn an insurance agent commission each time they enroll a new client in a life insurance scheme. They also earn a commission when they renew or pay premiums for their life insurance schemes. This means that as an agent, you stand to earn a good amount of commission when you sell a number of policies per month.
Commission is usually a percentage of policy premium and so, selling high value premium policies increases their commission. Agents usually coax clients to buy high value premium policies for this reason but it is important to note that agents may need to reveal their commission to clients if clients demand so.
Basics of life insurance commission structures
Life insurance agents earn a commission as the primary means of income. The life insurance industry employs more than 338,500 people in the industry in the life and health sector of insurance.
Most insurance agents work either independently or as an employee of a major life insurance company. The average salary of an insurance agent in the life insurance industry is 62,500 USD and ranges between 33,000 and 99,000 USD based on the location.
The most important component of a life insurance agent's compensation is the commission structure. Most agents work are employed by a life insurance company and work specifically for the brand but some may work independently as a self employed agent. Such agents can work with multiple insurance brands and companies and can suggest the best policies in the industry.
For life insurance agents who are employed, they may have a base salary plus a commission structure on the number of life insurance policies sold and the premium value of each policy.
- Agents receive anywhere between 40 to 115 percent commission on first year premiums
- Renewal of insurance gets them 1 to 2 percent commission, some companies pay between 4 and 5 percent as well based on market and policy value
- Whole life insurance plans fetch the best commission with 100 percent and above value of total premium paid by client in the first year
- Universal life insurance plans also fetch 100 percent and above commission value of the policy premium in the first year up to target premium
- Term insurance policies fetch lesser commission in comparison to whole and universal policies at the rate of 30 to 80 percent based on the insurance company.
First-year and renewal commissions
Most companies will offer a high percentage of commission for the first year premium of their clients when they sign the client up for insurance policies. This is a strategy that companies use to lure in more sign ups and sell more policies using agents.
Agents can therefore use this opportunity to get more clients and use their first year premium to fuel their commissions. An agent can get anywhere between 80 to 115 percent commission on the first year premiums made by the policyholder.
As the policy holder graduates from the first year and moves on to pay yearly premiums, the commission structure also drops for the agent, which is designed in a way so that agents benefit from their clients on a yearly basis but also need to keep selling new policies.
This yearly commission is called a renewal commission or trailing commission. The rate for renewal and trailing commission is usually between 2 and 5 percent. Some companies pay only between 1 and 3 percent and this varies based on the type of policy, insurance company and market.
To understand how commissions are calculated, let us take an example of a policyholder who purchases a whole life insurance plan at the age of 21 and has a premium of 1200 USD per year.
- The agent who sells this plan will make 100 percent of the first year premiums as his commission if the insurance company gives him a 100 percent insurance commission rate on new policies. This means that the agent will make 1200 USD for the first year.
- If the renewal commission rate is set to 5 percent, then the agent will continue making 60 USD each time the policyholder renews the policy post the first year.
- So by selling just one policy, the agent will earn 1200 USD in the first year and 60 USD every year until the policy covers the policyholder. The agents in the US make around 55,000 to 75,000 USD if they sell just one policy every week in this manner.
Commission rates and carriers
The life and annuity insurance industry in the US is currently bringing in revenue of over 1 trillion USD as of the year 2022. The growth rate is above 80 billion USD just between 2020 and 2021 which suggests that more and more people are investing in life insurance policies and therefore, as an agent, this is the perfect time to reap the benefits.
Agents today are able to sell more policies and earn more commissions thanks to the awareness about insurance products in the market as opposed to the pre pandemic era.
The commission rates in the US depend on numerous factors and as an agent, the choice of selecting the best insurance carrier to work for will make all the difference in how much revenue you will make each year. In the US, some of the top insurance companies with the best market share and that payout the best commissions are:
- MetLife Insurance Company
- AIG Group
- Prudential Financial
- Aflac
- Principal
The commission rate that the insurance carriers offer depends on many factors:
- Location and Market
Alaska, South and North Dakota, Oregon, Washington, Wisconsin, Alabama are some of the states where the insurance agents get a higher pay of above 80,000 USD in commission. Cities like NY, San Jose, Santa Clara, Chicago, Bloomington etc had the highest annual mean wages between 110 and 160K USD for insurance agents. The market and the trends of the commission are interlinked and therefore where the market for insurance is in high demand, the commissions are also higher.
- Experience of the insurance agent
A survey revealed that insurance agents who have had higher experiences grabbed more policy sales and therefore had higher incomes which ranged between 70 and 90k USD whereas new hires and novice life insurance agents were able to make between 35k and 50K USD.
As they become more experienced in the field, agents are able to fine tune their clients and sell better value policies which improves their overall commission and income.
- Type of policy sold
Whole life policies and universal policies fetch very good commission rates whereas single premium policies and term policies. Clients that are financially strong and have the ability to pay for long periods should be selected carefully as insurance carriers may fine agents if the policy holder does not pay beyond the first few years.
- Number of policies sold / Volume sales
Some companies offer an additional bonus or commission for selling in bulk and achieving a volume target. As an agent, this can work wonders to add to the annual compensation and improve the overall earnings.
When agents sell in good volume, their income with 1st year commission and trailing commissions ensure a good overall income for a long period of time.
Some insurance carriers offer bonuses, paid vacations, free air tickets, international tour programs and cash prizes as well to encourage and motivate their agents. This proves to be an effective engagement activity that helps increase sales for the carriers and benefits the agents.
Persistency and policyholder retention
It is important to note that policyholders need to pay a continued renewal in the form of premium to the insurance company so as to retain their policies in good condition.
Agents and policyholders must have good faith and therefore support each other. When policyholders do not pay after the first year or after a few years, the agents have to pay back a portion of their commission earned on the policy.
Retaining clients is essential to build a lasting insurer network and to ensure that you are paid renewal commission for longer periods of time. When clients are not chosen properly or if the client does not have a good relationship with the carrier or the agent, it affects all parties involved.
Carriers therefore reward their insurers with a persistence bonus for paying all premiums until maturity. Agents also get a persistence linked incentive on the same.
Some strategies agents can make use of to retain policy holders are:
- Having a strong relationship even after the sale of a policy
- Offering them tips and general information on how their policy will help them as laws change and during taxation
- Taking in friends or family members on board the policy plan so that policy holder shares mutual interest and responsibility to retain policy
- An effective lead generation, nurturing and qualifying strategy that analyzes the potential of client to pay premiums along with financial background check
Industry regulation and licensing
In the US, an agent who is aspiring to sell life insurance products must first enroll in a class to study and pass the pre-licensing course that covers all the mandatory principles of life insurance, coverage, policy highlights and coverage and the ethics of the state.
- Once an agent completes the required courses and classes, they will need to take a proctored examination to acquire the completion certificate.
- After clearing the exam, you will need to file for an insurance agent license by paying a fee which varies between 10 to 100 USD based on the state.
- Agents will also need to acquire a broker bond that helps in validating the insurance agents business and helps in protecting the clients against fraud.
Once an agent acquires the license, they must continually keep updating with the industry standards, the changes in the market, the new products and insurance coverage and many other important topics.
The license needs to be renewed after a certain interval of time which varies from state to state. The agent will need to take the exam again with an updated set of industry changes and market knowledge.
Tax considerations for agents
Agents who are independently working with two or more carriers fall under the self employment category and enjoy a few privileges when it comes to taxation. Agents who are employed by insurance carriers and who have annual base incomes, pension plans and other benefits have regular salaried income taxation norms.
Under the self employed category, the following mandates are applicable on agents:
- All commissions that are earned are categorized as income and there is a 15.3 percent tax over and above the tax on the overall net income based on the bracket
- Multiple deductions can be made to save taxes which includes commute expenses, ads and marketing expenses, office utilities and maintenance fees etc
- All legal expenses, taxes and other insurance expenses can also be waived off
- Expense for licenses, continual education, additional courses and certifications and exempt from taxes
As an insurance agent, you can save tax on many office based expenses and even insurance that you pay for office and office related utilities. Even the software that you may use can be exempt from taxes as business expenses.
You can register yourself as a small sole proprietary business owner and get 20 percent exemption in taxes under the QBID scheme. These measures will help you save money and improve overall earnings.
Conclusion
The insurance sector employs a whooping 338,000 people as of 2021 and an additional 48,300 openings are expected to come along each year.
There is a projected growth of 8 percent in the insurance industry job sector and with the ever-so-high demand for life insurance products, agents can bag up a good salary and commission structure if they grab the opportunity now.
As a new hire in an insurance carrier, you will need to build your personal and communication skills along with market knowledge to tap into the right clientele. But once agents get into the process of selling more and more policies, referrals and recommendations can help gain more popularity and build sales.
Having an honest and transparent relationship with clients is of foremost importance as it improves your image in the market and helps you sell more policies and earn more commission eventually.
