If you’re shopping for life insurance, you have several options: buying online, going directly through an insurer, or working with an agent.
How Life Insurance Agent Commissions Work
Knowing how agents get paid is key to smart life insurance shopping. Commission structures vary, but typically, agents receive a significant commission, often between 60% to 80%, of the premiums you pay in the first year of your policy. They then collect smaller commissions in the following years. Over the life of a policy, commissions can total 5% to 10% of all premiums paid.
In 2023, life insurance companies paid approximately $55 billion in commissions, according to the 2024 ACLI Fact Book. This accounted for 6% of insurers’ total operating expenses.
It’s worth noting that if you stop paying premiums and let your policy lapse within the first couple of years, the insurance company might require the agent to repay some of the commissions they earned.
Permanent life insurance policies, such as whole life, often don’t build cash value quickly because initial commissions and other expenses incurred by insurers to issue the policies. Term life insurance, on the other hand, is often more affordable because it does not have those types of fees.
Why Agent Commissions Matter
Because agent commissions are a percentage of premiums, agents have an incentive to promote policies with higher premiums — like permanent life insurance. These policies offer lifelong coverage and include a cash value component that accrues interest.
Premiums for permanent life insurance can be six to ten times higher than those for term life insurance. This might lead some agents to recommend permanent policies, even if the commission percentage is the same, because the total commission earned is higher.
Life insurance companies sometimes offer higher commission percentages for permanent policies, primarily because these policies require more ‘servicing’. They’re in force longer, and they require constant monitoring of the investments. Commissions also slow the cash value growth in permanent policies, especially in the initial years.
How to Be a Smart Customer
During the application process, it’s reasonable to ask your life insurance agent about their commission. However, they might be hesitant to share this information because commissions can vary.
In some states, agents are required to disclose their commission if requested. Consider looking into ‘low-load’ insurers, which employ salaried consultants instead of commissioned agents. Most of the market is made up of ‘load’ insurers that pay commissions to their agents.
When selecting a life insurance policy, concentrate on long-term policy performance rather than the commission structure.
Consider laddering life insurance policies. Term life insurance is sufficient for most people, featuring generally lower costs and commissions. If you’re considering cash value life insurance, you might be able to lower the total commission by blending term and permanent policies, such as adding a term rider during the life of the policy, and then potentially converting it to permanent coverage later on. With whole life policies, you can utilize dividends to purchase paid-up additions or term life insurance.
Prioritize overall policy performance and premiums. While a specific policy may have higher commissions, it may have lower costs of insurance, charge lower fees, or pay a higher interest rate on the cash value component.
