Life Insurance Commissions – How Life Insurance Agents Are Paid

Life insurance agents can get paid very well for making big sales. Ever wonder how your life insurance agent gets paid? Are you worried that they are making too much money on the products you bought? well, look no further. This is the definitive guide on how life insurance agents make money.

It may not surprise most people that agents typically make their money from commissions for selling life insurance products. There are also three other ways an agent can be paid besides commissions. these include service fees, financial arrangements, and “other” compensation. Read on to learn more about how life insurance agents can make money off of you, the consumer.

Reading: How are insurance agents commissions calculated


Commissions are based on the size of the policy being sold by the agent (measured by annual premiums) and the type of product being sold. Products such as variable universal life insurance, variable insurance, and universal life insurance typically have the highest profit margins for the life insurance company and therefore pay the highest commission rates to agents.

Whole life insurance is considered the staple product of most life insurance companies, and agents are well paid to sell a whole life insurance policy. Generally, a term life insurance policy carries the smallest commission, not only because it is the least expensive type of life insurance for clients, but also (usually) has small margins for the life insurance company . life insurance agents don’t get rich selling term life insurance unless they sell it in mass quantities.

There are two forms of commission payments to life insurance agents: first year commission payments and renewal commission payments.

first year commission payment

The first year commission payment is a payment equal to a percentage of the total annual premium payment to be made on the policy during the first year of the policy. Agent fees are typically anywhere from 40% to 90% (depending on company and product) of the premium paid in the first year.

Even if the contract owner does not make the payment in a lump sum (for example, monthly or quarterly payments were chosen), the life insurance company will sometimes calculate the agent’s commission based on the expected premiums of the first year and will pay the agent all the money in advance. this is known as an annualized commission calculation. sometimes this is only done for relatively new agents (ie during the first 3 years of employment) as a benefit to them. Some companies can only do this when the premium is set to an automatic payment, known as a preauthorized check (PAC). if the customer cancels the policy before the end of the first year, the company will reset agent commissions thereafter for any unpaid scheduled premiums due during the first year.

Other times, the company may pay the agent as premium payments are received. Some companies may give agents the option, and the payout percentage may be slightly higher for those who choose to get paid as money is received.


For example, let’s say the agent is paid a 60% commission rate on a whole life insurance product with first year premiums due of $4,000 (or about $333 per month). the agent would receive 60% of the $4,000, which equates to a $2,400 commission. this is paid to the agent as a lump sum as soon as the first premium payment is made if it is an annualized commission.

If the customer makes a monthly premium payment of $333 and the agent collects as the money comes in, they will receive 60% x $333 or approximately $200 each time a monthly payment is made during the first year of the policy. A commission on term insurance would be calculated similarly to whole life, except most companies have a different percentage of premiums paid as commission for whole life and term.

For universal products, the commission calculation is a bit more complicated. Based on a number of factors, including face value, a target premium is set. The agent is paid a percentage of the total premiums up to the target premium, and for additional payments above the target premium, the agent will receive a much lower percentage. Universal Universal and Universal Variable policies have a radically different commission structure than whole life and term policies because they have a flexible premium schedule.

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Suppose a client has a universal life insurance policy with a target premium of $100 per month ($1,200 per year), and the agent is paid as the premium is received by the insurance company at a rate of 70%. % during the first year up to the target premium amount. for payments made on the target premium, the agent receives 20%. each payment of $100 by the client results in the agent being paid $70.

if during the last month of the first policy year the client has made all premium payments (total payments to date $1200) but decides they have some extra money and would like to add another $500 to the policy, this is completely above the target premium amount. the additional $500 results in a commission of $500 x 20% which equals $100. for this year, the agent would have received $70 x 12 for the scheduled premiums and $100 for the additional premium, for a total commission of $940.

The first year’s commission is where most agents receive the majority of their total pay. the commissions agents receive after the first year is up are significantly lower. these are known as renewal fees.

renewal fees

A renewal fee is a fee paid for a specified number of years after the first year of the policy. The number of years after the first year that a renewal is paid for varies by company, but is generally a significant number of years. The commission paid on a renewal is typically between 2% and 5% of the premiums paid on the policy during those specific years, but can be higher depending on the company’s commission structure.

Renewal fees are generally not annualized and are paid as the premium is remitted to the life insurance company. Although the commissions are significantly lower for renewals than during the first year, they serve an important purpose from the point of view of life insurance companies. them:

  • provide the agent with ongoing compensation (good for keeping agents happy).
  • serve as payment to agents for the continued service required by life insurance policies.
  • reward an agent for persistent (long-lasting) business. persistent business is good for life insurance companies (lower commissions and lower processing costs for underwriting, new policies, setting up customer profiles, etc.)
  • reward agents and offer them an incentive for being loyal to the company.
  • can provide an agent with retirement income if commission is awarded (still paid even after you leave the company).
  • Although an individual renewal fee is typically not a lot of money, total renewals from an agent’s portfolio of business can become a good source of income for the agent. renewals reward the agent for attracting loyal customers and for the agent’s loyalty to the company.

    Renewal commissions can be awarded, not awarded, or conditionally. As discussed above, a vested commission is one that will be paid even if the agent leaves the company. A non-earned commission will not be paid if the agent no longer has a contract with the company. A conditionally vested commission is a renewal commission that starts out as not vested, but after the agent has been with the company for a certain number of years or when the agent reaches a certain age, it becomes fully vested.

    The award gives an agent an equity interest in the business it generates and adds a significant element of income to their salary. All things being equal, the sooner renewal fees are awarded and the higher the award amount an agent has, the better the compensation package. Renewal commissions earned can even be transferred after an agent dies; The stream of income provides another level of financial protection for your family on top of other assets and any life insurance they already own.

    typical commission structures

    Insurance companies classify commission structures into one of three categories. The three classifications for commission structures are:

    1. pilled commission structure: the piled commission structure that most companies use for individual life insurance. this is the structure when commissions on first year premiums are very high and renewal premiums are much lower.
    2. Tiered Commission Structure: The tiered structure provides exactly the same commission during the first year and commission renewal periods. this is a more common structure with group life insurance (insurance sold or provided through an employer to employees).
    3. Leveled commission structure: This is when a higher percentage is paid as commission on first year premiums than on renewals, but the difference between the two is much less severe than the structure commissions heaped. this is also more common with group living products.
    4. As you’re probably aware, the accrued commission structure is intended to reward agents for making lots of sales by providing a strong incentive to attract new customers. Tiered and tiered structures reward an agent for having longevity with their existing customers. Those structures make it in the agent’s best interest to keep their existing business because a renewal on an expired policy cannot be afforded. Most of the time, if you purchased your life insurance as an individual from an agent, your agent will be paid based on the collated commission structure.

      service fees

      Service fees are another way agents are paid. They are very similar to renewal commissions, except they are usually offered to agents at a lower rate. a service fee is a percentage of additional premium payments (usually around 1%-2% of premiums paid) paid to agents after there are no more renewal fees as an incentive to keep the service going the existing policy. sometimes the renewal commissions are transferred to a service fee after the policy becomes very old, or sometimes the writing agent (the agent who initially sold the policy) no longer has a contract with the insurance company of life and the policy is assigned to a “service agent”. ”.

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      The service agents’ job is to continue to provide guidance and service to the policyholder. the service fee is intended to provide an incentive for them to do this. From a life insurance company’s perspective, this fee prevents service agents from ignoring customer service requests and helps maintain long-term relationships with customers. for a service agent it is a way to be compensated for occasional service work that may accompany a previous policy.

      Service fees do not typically represent a large portion of an agent’s total compensation. Some agents may look for what are known as “orphan policies or orphan clients” (customer or policies whose agent has left the company) even though they may not be paid much in service fees. this gives the agent the opportunity to sell new business to the customer who has already bought from the company, increasing the chances that the agents will make another sale.

      If you are assigned a service agent from your life insurance company, the life insurance company is not paying you a lot of money in service fees. may want to discuss your current life insurance and financial plan with you to sell additional products.

      financing arrangements

      Financing agreements are a third way life insurance agents are compensated. Arrangement financing usually occurs during the first few years of an agent’s employment. they are intended to subsidize the amount of money an agent earns from commissions while new agents build their book of business to a sustainable level of income. Financing agreements typically allow an agent to earn money solely from commissions after the first 3-4 years of employment have passed. funding deals are just a bridge to provide new agents with a steady monthly income until they earn enough commission on a regular basis.

      Financing arrangements can take the form of advances, which is like a loan made by the life insurance company to the agent in anticipation of future commissions. Advances must be repaid and are typically repaid through future commissions earned. if an agent leaves the company, the retainer must still be fully repaid in most cases.

      Some companies also offer an agent grant scheme. this is meant to ensure that an agent’s income never falls below a certain level. a business might set a revenue floor of $3,000 for example. If during the month the agent only generates $2,300 in commission income, the insurance company would pay the additional $700 to meet the subsidy floor.

      Companies may also provide a salary to new agents. this is very similar to a subsidy plan. A salary is usually a fixed minimum income, but the life insurance company does not pay any commission to the agent unless their total commissions exceed the salary. Commissions paid in excess of a salary are generally at a reduced rate from an agent not receiving a salary for the same company.

      Agents are often stressed by their financial arrangements because they have to pay back money or have to do a lot of certain business-related activities, such as making cold calls, scheduling appointments, or attending training and meetings on a regular basis. Requirements for agents to receive funding and maintain employment with the company are set out in what is known as a validation schedule.

      other compensation

      There are four other miscellaneous ways agents are compensated. these include:

      • Bonuses: Bonuses can be paid if the agent reaches certain sales goals, or maintains employment with the company for a certain number of years, or even maintains a certain level of payment of commissions for a long period of time. Bonus thresholds are set for agents in what is known as a bonus compensation schedule.
      • Benefits: Like any employee, Agents may receive paid or provided benefits at a reduced rate. These may include profit-sharing plans, insurance coverage, and retirement plans. benefits form an important part of an agent’s total compensation.
      • expense allowances: Some companies will pay certain expenses for their agents, such as new computer equipment, advertising, or office space.
      • support service: Life insurance companies provide support services such as administrative staff, secretaries, national customer service lines, and basic office equipment such as copiers and printers. Though often overlooked, support adds a lot of value to an agent’s business.
      • how much does the average agent make?

        There really is no such thing as an “average” agent. Most agents don’t make enough money to last more than 3 years in business. of those who survive, most earn enough to provide middle to upper-middle class incomes. It is rare for a life insurance agent to earn more than $200,000 per year, although some do. each major company may have a very small handful of agents earning more than $1,000,000 per year. These agents typically write large group corporate policies or work with extremely high net worth individuals (ie hedge fund managers or CEOs). It can be seen that most professional life insurance agents are “comfortable”, but very few are “rich”.

        If it’s any consolation, life insurance commissions, premiums, and marketing practices are subject to oversight by state insurance regulators. while agents are paid to sell you a life insurance policy, they are not paid exorbitantly.

        See also: Life insurance for elderly people