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How Do an Insurance Agent's Sales Commissions Work?

Insurance Agent Development
Feb 8, 2022
minute read
Nectar Team
How Do an Insurance Agent's Sales Commissions Work?

Ever wonder exactly how an insurance agent makes money? Knowing the fine details of insurance agent payment structures presents complications. Commission payment structures impact everything about life as an insurance agent.  Your payment sees an impact depending on whether you are an independent insurance agent or a producer working on the payroll of an agency. Having a firm grasp of how insurance agents net a profit is beneficial for aspiring agents, consumers, and everyone in between. 

The Insurance Agent Job Market at a Glance

The insurance agent job market is constantly thriving. There are currently more than 500,000 insurance agent jobs in the U.S., and this is expected to increase by 7% from 2020 to 2030.  No matter the state of the economy, there is always a need to buy insurance coverage.

The great thing about an insurance sales agent is that a typical entry level for education is a high school diploma or equivalent. There is also no work experience necessary. You can break into the insurance industry and become an insurance agent in no time, selling one or more types of insurance as you gain knowledge. 

How Do Insurance Agents Make Money?

There are two ways in which insurance agents make money. Some insurance agents work as producers for insurance agencies. These individuals may be on a salary to sell insurance on behalf of the agency. The other type of insurance agent is independent, relying on commission for their income.

Insurance premium base commission

Most insurance agents make money on commissions based on the premium charged to the policy. The first term to know here is the base commission. The base commission is the standard commission an insurance agent will earn for the policy sold, and it's expressed as a percentage of the premium. The coverage and line of business sold determines what commission applies. For instance, an insurance agent may make a 10% commission if they sell an auto insurance policy, while they may make a 15% commission on a general liability policy. 

Let's look at the example of an insurance agent who sells an auto insurance policy with a premium of $2,000. If the commission on that type of policy is 10%, the insurance agent will earn $200 for the sale of that policy.

Supplemental or contingent commissions

Insurance agents also can earn what is known as supplemental or contingent commission. This type of commission rewards certain metrics the agent hits, such as premium dollars sold, policyholder retention, or growth of the insurance book. The supplemental commission is typically something set at the onset of a given year, at a set percentage. When the year is over, an insurance company will determine whether the insurance agent hit their targets to earn the supplemental or contingent commissions.

Payment on salary

Another option when it comes to insurance agents is they become a producer for a larger insurance agency. in this case, they may end up on a salary. A salary is traditionally not as advantageous financially for an insurance agent. In this scenario, the performance of the agent is still dependent on what they sell. At the end of the day, though, the insurance agent is only making the salary that they agree to with the agency for that given year. 

How Much Do Insurance Agents Make?

According to the United States Bureau of Labor Statistics, the median annual wage for an insurance agent is around $52,180. However, there is a wide range. The lowest 10% of insurance agents earn less than $29,000 in a given year. The highest 10% of insurance agents can make over $125,000. 

Again, the compensation an insurance agent receives all comes down to the volume of policies sold, the retention of policyholders, loss ratios, and more. If you are an insurance agent with a network of quality policyholders renewing one year after the next with minimal losses, you can do quite well and continue to build on that insurance book over time. 

Common Commission Structures in Insurance

There is a multitude of different commission structures in the insurance industry. As an insurance agent looking to break into the space, you should know what to expect from a payment perspective. The commission models affect not only how much you earn, but how and when you get paid, too.

Residual commission

The residual commission structure is the most common in the insurance industry. With this model, you have commission payments set in direct relation to the premium. When you are an insurance agent trying to sell a home insurance policy, for instance, you get a percentage of the premium at the time of the sale. The type of coverage you sell dictates the percentage of the premium you obtain from the insurance provider. Each insurance carrier has different commission structures, so it's important to be knowledgeable about what each pays.

You also will get a commission if your client renews the policy when it comes up after the original in-force period. The renewal percentage rate is typically lower than the new business commission percentage, but it is still money in your pocket.

Upfront commission

The other common payment structure in the insurance industry is upfront commission. This type of commission arrangement is most common when it comes to life insurance or annuities. When the initial policy sells, the percentage of the premium you make in year one is significant and could be as high as 40–90%. After the initial year, it drops to around 2% to 5% of the annual premiums paid into the policy for that renewal year. An insurance agency owner determines how much the agency keeps for commission and how much they pay to the agent. 

The Pros and Cons of Earning Commission

There are many factors to consider when thinking about becoming an insurance agent and working on commission. Commission can be great, but it can also create a lot of stress. 

Ever work on salary and make the same as the person who puts in half the effort you do? If you put in extra hours and come up with unique ideas, you don't see an extra penny. Your salary is set, and that's that. With commission, if you put in extra work and increase your insurance sales, you will see it in your paycheck. The benefits of commission come down to you being your own boss, owning what you make, and being able to control it with your level of effort and skill at selling insurance.

There are some downsides to working on commission as well. Not everyone is fit for a sales position, and that is exactly what you are as an insurance agent. You need to build up a network of clients, lean on them over the years, and continue to grow that network. If you fail to do this or have no motivation to seek out leads and push sales, you're not going to earn very much commission. 

The Impact of Lead Generation and Marketing

You are your own marketing firm when it comes to being an insurance agent. What you earn comes down to the effort you put in. You need to do all you can to get your name out there as someone that a customer can rely on if they need a specific type of insurance coverage. Social media and the internet overall provide great outlets to reach folks, share your knowledge, and build up that client base.

A lot of the success you have — and commission you earn — as an insurance agent comes from lead generation. To sell an insurance policy, you need to have someone who wants to buy insurance in the first place. An insurance agent that generates a lot of high-quality leads can earn quite a bit in commission. The better you can get at not simply selling, but finding the right people to sell to, the better your results will be.

Grow Your Commissions with Nectar

There is a lot that goes into becoming an insurance agent and understanding how they make money. Insurance agents can work off of salary for an insurance agency, but it is likely going to lead to poor earnings and rapid burnout. Commissions are generally a better option, but they generally come with some challenges. Still, you'll be rewarded for your efforts if you stick with it.

As you're growing your business and looking for those strong leads, Nectar can help you build momentum. We offer real-time leads that target your specific clientele and life insurance, health insurance, and Medicare products.  We can match you up with individuals that want to talk insurance and crack the door open so you can do your sales work. 

This article reflects the features of Nectar as of the date of publication. Features are subject to change at any time. This article is meant for informational purposes only, it is not a guarantee that using Nectar will help you achieve specific business or financial results and is not intended to serve as the sole recommendation for any business financial decisions.

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