How are insurance agents commissions calculated?

A recent search for insurance agent jobs in Oklahoma on the employment website Indeed pulled up 430 listings. That’s quite a bit of demand and some of these listings offered huge pay ranges. For example, a couple of the jobs listed at the top of the search results showed pay ranging from as low as $29,500 to as high as $141,516.

If you are familiar with the insurance industry and with an insurance agent’s pay structure, you likely understand the wide salary range. If you just got your insurance license and are new to the business or are looking to make a career change to the insurance industry, it may not immediately be clear. 

This blog will take a look at some of the factors that figure into how insurance agents commissions are calculated. We’ll look at the impacts of joining a cluster, how to calculate commissions and how being a captive or independent agent will impact your bottom line.   

If you currently work as a captive agent and are looking to make the transition to an independent agent, download SIAA’s free ebook: How to Transition from a Captive to Independent Agent. It provides a lot of great information to walk you through the process.

Captive vs independent: how does it affect my commission?

Insurance agents are either considered captive agents or independent agents. 

Captive agents work for one insurance company and are usually paid with a combination of salary and commission, plus benefits. Typically commissions for captive agents are considerably lower than independent agents. 

Advantages of being a captive agent include having administrative support and a marketing/advertising department or budget, and being provided with a starting book of business. Disadvantages include being required to do extensive paperwork and contracts while limited to selling specific products that may not be the best option for the customer.

Independent agents, often called insurance producers, sell different types of insurance products for multiple insurance companies. Since they are not employees of the insurance companies, they work on commission percentages.

Their commission schedule depends on their contract with the insurance company and the percentage varies depending on variables such as the type of insurance or policy. An advantage of being an independent agent is the flexibility they enjoy being able to bring the best product to the customer. This type of service often strengthens client relationships and helps the agent build their book and bottom line. While independent agents have higher lifetime earnings, some may consider the fact that they have to pay all of the bills, taxes, payroll, and so on to keep their business open to be their biggest disadvantage.

How are independent agent commissions with and without a cluster?

Direct appointment with a carrier means you gain 100 percent of the commission paid. When you partner with a cluster, that usually doesn’t apply. It’s important when you partner with a cluster to have a firm understanding of its commission rates and how they are paid. Also realize that while it may be upsetting to not receive 100 percent of your hard earned commissions, the alternative is that you earn nothing when business is slow or poor.

This is another example of how independent agent life is inherently more risky than working as a captive agent. Clusters can help balance things most of the time as they offer profit sharing with no minimum volume.

An Introduction to Commission Calculations

As noted earlier, captive insurance agents work as producers for insurance agencies. They may sell insurance on a salary or salary/commission basis. Often they can earn supplemental or contingent commission as additional payments for hitting specific metrics that are set at the beginning of the year. Metrics might include growth of book, customer retention, new customer leads and annual premiums sold.

Independent insurance agents earnings are commissions based on the premium charged for an insurance policy. A base commission is the standard and is a percentage of the insurance premium paid. Percentages vary based on the type of policy, coverages and risk level.

Commissions are typically structured as residual or upfront. With residual, an initial commission is paid when the policy is sold. A lower percentage payment is made at each renewal. These commissions are common with health insurance and auto policies. By their very nature, they have a greater impact on an agent’s long-term earnings than upfront commissions.

Upfront commissions are single, upfront payments earned when a policy is sold. These commissions are most commonly seen with the sale of term life, life insurance and annuity policies. Of note, some sources claim that the most lucrative career in the insurance field is selling life insurance. 

A typical life insurance agent receives commission ranging from 30 percent to 90 percent of the policy year premiums paid the first year. In later years, the agent may receive from 3 percent to 10 percent of each year's renewals. However, be aware that life insurance agents must constantly search for potential new customers and be prepared for a lot of rejection.

How to Calculate Insurance Agent Commissions

It’s only natural for employees to want to know how much they are being paid. Insurance agents are no different. And for independent agents, knowing how much your annual or year commission will be is critical to developing a business plan for your agency. Follow these three easy steps to get a pretty solid grasp of your commission.

1. Determine your base commission from the rate sheet your insurance company provided.
   
   
2. Determine your override, if you receive one. An override is additional commission paid to you for overhead or marketing. This amount may be negotiable.
   
   
3. Make your calculations. Take the premium paid on an insurance policy and multiply it by your base commission amount. Then, take the premium and multiply it by your override amount. Add the two together. This represents your total commission.
   
   

Some steps may change if you’re captive vs an independent agent.

This formula will likely change depending on your circumstances. For example, if you’re a captive vs independent or solo vs independent with cluster, each situation will likely affect the calculations

If you’re purely independent, you won’t have any type of override and will deal with a level commission. Your base commission will be 100 percent. 

If you’re independent with a cluster, you may have an override commission that is based on your profit sharing calculations. There also may be a percentage taken out based on that profit sharing schema as well. Remember, the cluster system is a safety-net for you to balance bad months with the good. 

SIAA is Here to Help

Making the leap to be an independent agent can be a bit scary. But it can also be exhilarating and offer freedom for you to help your customers in the best way possible. Our ebook provides everything you need to know to start the transition. Download it here at no cost.