Sunday, April 04, 2010

About Compensation in Insurance Sales

The vast majority of insurance agents are paid entirely with commissions. If an agent does not sell enough insurance policies to earn enough commissions to pay the bills, there is no safety net that will provide the necessary income.

This fact is what makes a career as an insurance agent a risky endeavor, but also what makes it attractive to motivated entrepreneurial-minded people. No salary also means no cap on income, and insurance agents will realize exactly what their skills are worth.

By understanding how agent compensation works, you will have an easier time deciding whether or not a career in the insurance industry fits your needs and personality.

Immediate Commission

After the successful sale of an insurance product, regardless of the specific type of policy, the agent who is responsible for acquiring the new client and closing the deal will be paid an immediate commission.

The type of policy sold will determine how much commission is earned, and different lines of insurance pay higher or lower percentages. For example, a life insurance policy commission will typically range between 50%-90% of the client’s initial annual premium, meaning a policy that costs the client $1,000 per year will pay the agent a one-time commission between $500-$900. Automobile insurance, on the other hand, pays a much smaller commission and is usually between 10%-15% of the client’s annual premium.


One of the primary advantages of an insurance career is the ability to get paid repeatedly. As compensation for assisting clients and handling any questions or concerns that may arise, insurance companies pay residual commissions, often called “trails,” to the agent who initially sold the policy.

Over time, the number of clients you have will continue to grow, which increases the amount of residual income every year. On the client’s policy anniversary date, the insurance carrier will pay the annual renewal commission percentage. Most life insurance policies have residual trails that range from 0.5% to as high as 2.5%.

The amount is minimal compared to the up-front commission earned on the sale. Automobile insurance, however, pays a trail amount very close to the up-front commission of 10%-15%.

Payout Options

Some types of insurance products, primarily those within the life insurance category, offer agents more than one choice of commission structures. Agents may choose a larger initial commission in exchange for a very small, or nonexistent, residual trail, or a reduced up-front payout in exchange for a larger trail.

For example, on a $1,000 annual premium life insurance sale, you can choose to receive $900 immediately and forfeit any residual payouts, you can take $750 immediately with a 1% trail, or you can opt for $500 up front with 2.5% residual commission.

Your ability to choose the payout structure of insurance commissions gives you the flexibility to control both your current and future income potential.

Overfunding Life Insurance

Another compensation aspect that is unique to life insurance agents involves permanent policies that are “overfunded,” wherein the total annual payment is more than what is required to maintain the coverage.

When the total annual payments to a permanent life insurance contract exceed the necessary premium, most insurance companies will immediately send an additional commission payment to the sales agent that is equal to a small percentage of the overfunded amount, and will continue to send the extra commission every time an excess payment is made by the client.

Monthly As-Earned

Some types of insurance, typically health insurance and related employee benefit policies, pay sales agents a minimal up-front commission and continue to pay the same amount every month. This method of compensation is called “as-earned” and serves to protect the insurance carrier from paying larger up-front commissions on policies that may not remain in force for the entire year.

As-earned commissions are advantageous to the insurance sales agent because they can effectively create a regular monthly salary.

Commission Scales

Insurance companies pay different commission amounts and percentages based on the level of production from each agent. Each carrier has its own commission scale and requirements for achieving higher levels of compensation.

Those agents who submit more new business and acquire clients with larger policies than other agents are rewarded for their success with increased commission percentages. Most insurance companies require agents to maintain a certain level of sales and production to continue receiving these increased commission percentages, and will decrease compensation to lower amounts if quotas and other criteria are not met.

Bonus Trips

Agents who meet or exceed predefined sales goals and production quotas can qualify for luxurious vacations and trips to exotic resorts around the world.

Almost every insurance company offers these trips to sales agents, and the estimated value of the vacation is included in the agent’s annual 1099 income statement. Many carriers will pay this amount to any sales agent who qualified for the trip but did not actually go on the vacation.


Beyond Quotes: Life Insurance Commissions
Safeco Insurance: Producer Compensation Disclosure
Financial Web: Are Life Insurance Commissions Healthy for the Industry?

This article is a Twisted Nonsense Exclusive! (04/04/2010)

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