Who Pays an Insurance Broker and What You Need to Know

You've got insurance needs, but you're not sure who pays the broker. The truth is, the cost of hiring an insurance broker is usually passed on to the policyholder.

Typically, insurance brokers are paid by the insurance companies they represent. This means the broker earns a commission from the insurer for selling their policies.

The amount of commission varies depending on the type of policy and the insurance company. For example, some insurance companies pay a fixed commission rate, while others pay a percentage of the policy premium.

As a policyholder, you may not directly pay the broker's commission, but you'll still end up paying for it through higher premiums.

Insurance brokers can make money in different ways, but the most common method is through commissions. They receive a percentage of your premium payment, which can range from 7% to 15% depending on the type of coverage and complexity of your policy.

Brokers can earn level commissions or graded commissions based on premium thresholds, and they may also receive an override commission for a block of business with a particular carrier. This override commission can include a small percentage for persistency, which means the higher the persistency with that carrier, the higher the percentage.

Some brokers are paid solely through commissions for policy purchases and renewals, but others may include additional fees for services such as voluntary benefits enrollment. These fees are usually disclosed upfront, so you won't be caught off guard.

Here's a breakdown of how brokers can earn money:

It's worth noting that some brokers may charge a fee for complex business insurance policies, but this is usually disclosed upfront.

Insurance brokers can earn money in different ways, depending on the type of insurance they specialize in. Some brokers earn commissions for every policy they sell, while others charge fees for specific services.

For example, health insurance brokers often earn commissions for every policy they sell, and may focus on plans that include Direct Primary Care to provide better value for businesses and individuals.

Auto insurance brokers, on the other hand, typically earn 5-10% of the premium as a commission.

Business insurance brokers may charge a broker fee for complex risk assessments or securing specialized policies for unique business needs.

Here's a breakdown of the different types of brokers and their earnings:

It's worth noting that most brokers work on behalf of the client while getting paid by the insurance carrier, aiming to find the best coverage without adding extra costs for you.

Insurance brokers can specialize in various types of insurance, earning money differently depending on their area of expertise.

Health insurance brokers earn commissions for every policy they sell, often focusing on plans that include Direct Primary Care to provide better value for businesses and individuals.

Auto insurance brokers work with multiple insurance carriers to find the best rates for clients, typically earning 5–10% of the premium as a commission.

Business insurance brokers may charge a broker fee for complex risk assessments or securing specialized policies for unique business needs.

Life insurance brokers often earn higher commissions upfront because life insurance policies involve long-term commitments.

Insurance brokers can be categorized based on their fee structures, with some charging a broker fee and others earning commissions from the insurance company.

Here are some examples of different types of insurance brokers and their earnings:

Insurance brokers and consultants/advisors work similarly, but have distinct fee structures. An insurance consultant typically charges a fee for service, which can be a direct invoice of billable hours or an offset with commissions received. They often forgo commissions from the insurance company, which means they must charge a consultant's fee.

The average consulting fee is 15% of the policy premium, with the percentage decreasing as the premium increases. For example, a higher premium might result in a lower percentage fee.

Insurance brokers, on the other hand, usually work for commission based on the policy's premium. However, some modern brokers' services have evolved to work more like consultants/advisors, providing ongoing services throughout the year.

Here's a comparison of the two:

It's essential to understand the fee structure and services provided by your broker or consultant before allowing them to search for insurance policies on your behalf. This will help you define the relationship and expectations of the services expected.

Insurance brokers are often paid through commissions based on insurance policies sold, which can range from 7% to 15% of the premium payment. This means they typically don't charge you directly for their services.

Brokers may also receive supplemental commissions, which can include overrides for a block of business with a particular carrier. These overrides often include a small percentage for persistency, meaning the higher the persistency with that carrier, the higher the percentage.

Some brokers charge fees for additional services, such as voluntary benefits enrollment, but this is not the norm.

Fee-based broker compensation has become more common, especially when brokers take on consultant or advisor roles. These fees are usually paid by insurance companies or billed directly to the client.

Here's a breakdown of the main differences between an insurance broker and a consultant/advisor:

It's essential to understand how your broker gets paid, as it can affect the cost of your insurance policy.

In Maine, insurance agents can earn a significant income from commissions paid by insurance companies. Exclusive agents often make a higher percentage commission on new business than renewals.

This can incentivize them to focus on writing new policies, which may lead to a higher overall income. Exclusive companies may stop paying agents after several years.

Independent agents, on the other hand, make the same commission on both new and renewal policies, allowing them to provide consistent customer service year after year. If you're an existing client of an independent agent, you're more valuable than a new one.

It takes an independent agent 3-5 years to recoup the cost of insuring a new customer, highlighting the importance of retaining clients.

The insurance company pays the agent's commission out of the premium they collect.

This means that the customer pays the agent's commission, but not by a separate line item on their bill.

The agent's commission percentage does not affect the premium amount, so you won't see a rise or fall in your premium based on the agent's commission.

You might pay more without an agent to advocate for you.

Some direct writers claim you save money by bypassing an agent, but it's not always true. Claim costs and insurance company expenses impact premiums.

You could pay less, too, but you need to know the system to get the best deal. If you don't know the system, you can leave money on the table.

Your local agent may know about certain discounts, like if your child is on the honor roll or away at college without a car. You might not think to ask about these discounts when you call in to do something else.

Independent agents act on your behalf, not just the insurance company's interests. They're more likely to ask about these discounts and help you save.