Purchasing insurance is a means to ensure your family's financial stability. As such, the insurance agents job market is thriving. A quick point-in-time search for ‘insurance’ in Oklahoma on ZipRecruiter returned more than 26,600 insurance-related job openings.
A key draw to the position of insurance agent is that entry level positions typically only require a high school diploma and no work experience. However, while a college degree is not usually required, employers may consider you a stronger candidate if you have a four-year degree in an applicable field such as finance or business. In short, you can join the insurance industry right out of high school and as you learn the industry you can add to your insurance offerings.
When researching the insurance industry as a possible career choice, you will want to understand the compensation structures. This blog will provide a basic overview of commission structures, looking at some of the various factors that can impact agents salaries and commissions.
If you already work for an insurance agency as a captive agent and are considering becoming an independent agent, SIAA offers a free ebook: How to Transition from a Captive to Independent Agent. This ebook provides all of the information you need to make an informed decision that is right for you!
Insurance Commissions: the Basics
Agents who have been in the game for some time most likely have a good grasp of their compensation plan. However, if you are new to the field, you should understand that insurance commission payment structures are an important part of an agent’s work and success. If you are an independent agent, your producer compensation may vary considerably from the agent who works on a salaried basis for one of the larger agencies.
Understanding how the insurance sales compensation structure works will help you recognize ways to increase your pay or bring home a higher commission.
Generally, most insurance agencies pay on commission. The agent earns commission when they sell a policy to a client. A portion of the premium is paid as agent commission but likely will be divided up among other members of the sales team or anyone who helped make the sale possible.
Specific Commission Structures
An insurance agency may structure their sales commissions differently, but payments are typically classified as either residual or upfront payments.
With residual commissions, an initial commission is paid when the policy is sold. Additional lower percentage payments are made with each subsequent renewal of the policy. In many states, insurance regulations limit commission payments to 10 years after the purchase date of the policy. Residual commissions are more common for health and auto type of insurance and have more long-term impact than upfront commissions.
Upfront commissions are the larger of the two commission percentages methods. Upfront commissions consist of a single, upfront payment earned when the policy is sold. These payments are more commonly seen with the sales of life insurance. Payments can amount to 10 percent or more of the premium purchase price for annuities and whole life insurance products.
Supplemental or Contingent Commissions
Some insurance companies pay a supplemental or contingent commission. Typically set at the beginning of the year, agents are given specific metrics as goals such as premium sales, growth of book of business or policyholder retention. A set percentage is paid as a supplemental commission if the company determines the agent reached their set goals.
An important consideration when looking at commission structures is the issue of clawback provisions, also known as chargeback.
Smaller or start-up firms often chose upfront commissions due in part to cash flow issues. However, many insurance companies' contracts include chargeback provisions they need to be aware of. These provisions allow the insurer to take back commissions if the policyholder cancels within a set period of time.
Some provisions allow the clawback of funds from a year or more after the contract was issued. That leaves it to the agency to absorb the loss or reclaim the money that was paid to salespeople, if they are still employed with the agency. These clawbacks can result in significant loss to small agencies if they don’t have funds set aside to cover cancellations.
Captive vs. independent: how does it affect my commission?
Many people just starting out in the insurance business chose to work as captive agents for one insurance company. While they typically earn lower commissions, they may be supplemented by a salary and benefits from their company. Also, while they are learning the business, the parent company usually provides marketing and lead generation, and training and support.
Independent agents are free to work with a number of insurance companies. They enjoy higher commissions and lifetime earnings, in addition to more freedom and flexibility. However, as an independent business owner, they are responsible for their taxes, benefits, marketing, payroll, licensing and so on. They also assume the risk that goes with owning a small business.
Learn More About Becoming an Independent Agent
If you are considering whether to make the change to become an independent agent, our ebook is a great tool to use in your research. How to Transition from a Captive to Independent Agent is available at no cost right here.