What You Need to Know About Compensation Rates

In the world of insurance, there are many types that one can sell. In this article, we’re going to cover Final Expense, Term, and Medicare insurance and the compensation rates for selling them.

Final Expense Insurance is a small policy that is typically bought to cover end of life expenses. Things like funeral, burial, casket, or medical costs are covered by these policies. These policies also have a corresponding face value that can be cashed out if the policy holder cancels. Alternate names for these kinds of policies are funeral insurance, burial insurance, simplified whole life insurance, and modified whole life insurance. Since these policies are generally smaller than normal life insurance, individuals are more likely to be approved for these policies.

Term Life Insurance is life insurance that only covers the client for a set number of years. These policies extend beyond FEX insurance and are a lot bigger. Many times, these policies cover not only costs like funeral & other end of life expenses, but also things like mortgage payments, college tuition, and any other debts or necessities the beneficiaries need. These policies tend to be very large; $500,000+ policies! The downside is if the time covered by the policy elapses, then unless the policy written has a return policy, the client and their beneficiaries don’t collect any money. However, there are some companies that allow for a transition into a whole life insurance policy.

Medicare Health Insurance is a government regulated health insurance policy for those who are retired and claim this benefit (with a few exceptions). There are many different policies that provide extra coverage that original Medicare doesn’t. There are Medicare Supplement plans (sometimes referred to as Medigap) that help reduce or eliminate co-pays and deductibles. Additionally, there’s Medicare Advantage plans that grants extended coverage depending on the plan (i.e. dental, vision, hearing, transportation, etc.). Finally, if a client only needs additional coverage for their medication, Prescription Drug Plans (PDP) maybe exactly what they need to cover those costs.

Selling insurance can be a very financially sustaining job if you (the agent) can secure many long term clients. You earn commissions based off of the policy you’ve written for your clients. For example, if you write a policy that totals $1000 a year to be paid in premiums, you can be paid up to $1000 in commissions for the first year depending on which type of insurance vendor you are and how much experience you have.

In the industry, you can either be an Independent or Captive sales agent.

A captive agent (also known as an exclusive agent) is one that is contracted by a specific insurance company and is obligated to only sell that company’s policies. Some of the benefits of being a captive agent is direct support from the company in terms of marketing, workspace, lead generation, etc. If a company gets a call from a client who is interested in buying a policy, they will forward them to a captive agent to discuss the sale further.

In contrast, an independent agent is one that can be contracted by multiple companies to sell various company’s policies. This can be beneficial because they are not bound by a single company’s policies that may not be suitable for some individuals. They can instead fill their portfolio with a vast array of products to potentially clinch more sales. However, they miss out on paid overhead and support that the captive counterparts receive. The independent agent must find their own leads and have their own workspace.

The most noteworthy difference between an independent or captive agent is the commission rates. Though rates vary from company to company, independent agents receive a higher commission rate across the board. This is because the company is not paying for any overhead or any leads to help the independent contractor. So, if you have your own system for getting leads and don’t need the help, going independent might be the best option for you. However, if you’re still starting out and need a helping hand, you can take the commission cut to have the company find clients for you.

There are a few types of commission payments that can be doled out depending on the company or if you are allowed to choose for yourself. First off is the advance of commission. This payment is based off of the total projected commission you would receive if your client pays for the 1st year of the policy. It can either be a percentage or a top dollar amount dictated by the company (or yourself). So, going back to the $1000 policy example from above, you could get an advance of commission of 50% right at the start of when the policy was issued. So, you get to pocket $500 right away. So after the client pays premiums up to $500, you will then start collecting as earned commission. So as clients make more payments, you collect commissions based off of those payments until the first year has ended.

One of the things you should be wary of is chargebacks. If a client cancels their policy before the year is over and your advance in commission has not been paid by the client in full, you are responsible for paying that money back. Originally, the advance in commission was to help with current costs (i.e. buying leads, bills, gas, etc.) and the client would slowly pay it as the months go by. However, if the client never pays that, then you owe the company the remaining balance. For example, if you were advanced $500 for the policy and your client only paid $400 of that, then you will be charged back $100 by the company. So you have to decide whether or not it’s a good idea to get large advances of commission. It could be beneficial to do so if you need it to invest into lead sources or other costs that’ll bolster your business, but you’ll need to make sure you don’t get to the point where you’re facing large amounts of chargebacks that you can’t cover out of pocket. It could be a quick way for you getting replaced or having to retire from the industry early.

There’s another option of when you can get your commission. There’s getting paid on issue or paying on first draft. Getting paid on issue means you can collect your advance in commission right as you finish writing your client your policy. So, after a day or two when you submitted the paperwork, you can collect the commission; this is known as fast money. Alternatively, you can wait to claim your advance after the client pays their first premium, the first draft. This is known as slow money. Either choice has its merits. If you need the advance right away, then you can choose to get the fast money. Of course, you still have to be wary of clients having second thoughts and canceling before their first payment thus causing a chargeback. If you elect the slow money route, you can prevent these financial headaches in the case of a client not following through with their purchase.

Now for what you all have been waiting for: how much commission can a sales agent receive for first year policies? When it comes to Term and FEX insurance, an independent agent should be looking to ask for 100% commission on first year policies. Of course, this varies from company to company, but if the agency is not supporting the agent in any way aside from the product they sell, it is up to the agent themselves to provide the money for buying leads, have a workspace to make the sales, and have a reliable mode of transportation if they have to drive to the client. All of these expenses are generally covered if you’re a captive agent. The commission rates for agents exclusive to a carrier can be around 40-50% because the company is supplying the agent with leads, a workspace, and a lot of the time mentorship to improve their craft; again, these rates vary depending on the agency, but overall captive agents are making less in commissions than independent agents across the board. In both cases, there are times when carriers will charge a policy fee which they will take anywhere between $30 – $50 off the monthly commission amount. These are known as haircuts.

Medicare commissions work slightly differently. The Centers for Medicare and Medicaid (CMS) is a government funded organization that regulates the max dollar amount for commissions earned on Medicare supplement plans. Over the past couple of years, this amount has increased steadily across the country. There are a few states that have slightly different compensation amounts on a written Medicare Advantage policy, but in the 2020, most states increased from $482 to $510 per member per year which is a 5.8% increase. And in 2021, commissions increased again from $510 to $539; a 5.7% increase. If this trend continues, you can expect another increase in 2022.

So you made your first couple policy write-ups, what can you expect after that? Once you get clients to sign up for policies, your next step is keeping them on their plans. Every year, the client must renew their coverage and if they stay with the carrier you signed them up with, you will get a small commission for the renewal. These rates can be anywhere between 2-5% of the yearly policy amount depending on the carrier. Though this seems like a little, renewing hundreds, or even thousands of clients on their plans can be a very sizeable income with little to no hassle; you typically don’t have to convince them to renew.

In time, you can have your commission rates increased. Depending on the carrier, if you can reach a certain amount of lifetime sales to increase your rates by 5-10% even on first year sales. So instead of making your normal 100% on a first year sale, if you become a seasoned veteran with your company, you can get bumped up to 105% or 110% or even more as an independent sales agent. As a captive agent, you could earn a higher salary instead of an increased commission rate. Everything depends on the company you work for or are representing. Even during the acquisition of contracts, you can (and should) ask about your compensation rates and how they can increase over time. These sales thresholds can be perfect for setting goals and milestones to achieve.