Key Takeaways
- Insurance brokers earn commissions on sold policies, ranging from 2% to 8%.
- Brokers represent consumers and help them navigate insurance options.
- Brokers cannot bind insurance coverage; this must be done by an agent or company.
- State regulations govern brokers to ensure compliance and client protection.
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When you hire an insurance broker, they work directly for you to research and find the right coverage for your specific needs. They have an independent duty to ensure unbiased policy recommendations. An insurance agent, on the other hand, usually works on behalf of an insurance company, and is the party that finalizes policy sales.
The insurance broker earns commissions on the sale of policies that are a certain percentage of the annual premium amounts. They can also earn fees by providing advisory services to clients and assisting with policy changes requested.
Revenue Streams Available to Insurance Brokers
The primary way that an insurance broker makes money is from commissions and fees earned on sold policies. These commissions are typically a percentage of the policy’s total annual premium. An insurance premium is the amount of money that an individual or business pays for an insurance policy.
Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Insurers use premiums to cover liabilities associated with the policies that they underwrite. They may also invest in premiums to generate higher returns and offset some of the costs of providing the insurance coverage, which can help an insurer keep prices competitive.
Insurers invest the premiums in assets with varying liquidity and return levels, but they are required to maintain a certain level of liquidity. State insurance regulators set the number of liquid assets necessary to ensure that insurers can pay claims.
An insurance broker or agent will often earn a lump sum percentage against the first-year premium of a policy that they sell and then a smaller but ongoing annual residual income payment over the policy’s life.
Exploring Additional Revenue Opportunities for Brokers
Brokers also make money by providing consultative and advisory services to clients for a fee. In certain circumstances, transactional fees can be charged. For instance, brokers can charge fees for initiating changes and helping to file claims.
States govern how and when brokers can charge fees. When permitted, the fees must meet certain criteria, such as being reasonable and agreed upon by the client and broker.
Controversially, some insurers incentivize brokers who perform well by paying bonuses or increased commissions. The compensation is often based on past performance and is used as motivation to continue certain behaviors that generate revenues.
However, because—in their clients’ best interest—brokers do not represent a specific company, this method of earning commissions is often frowned upon.
How Brokers Advocate for Client Needs
The broker is employed to represent their clients’ best interests. Part of the broker’s duty is to understand the clients’ situation, needs, and desires to find the best insurance policy within their budget. Choosing the right insurance plan can be complicated, and studies show that many people choose a less-than-optimal plan when they rely solely on their own judgment.
Besides being well-versed on offerings from all insurance companies, brokers should not favor any specific company. As a result, brokers are paid a commission rather than receiving payment from insurance companies, as the latter could create negative incentives that damage trust between the broker and the client.
A broker has an important responsibility to help people navigate among insurance plans, many of which have subtle differences. In addition to connecting clients to the right policy, the broker continues to have obligations to their clients.
Important
A broker provides consultative services to help clients submit claims and receive benefits, in addition to determining whether policies should be changed.
Investopedia / Yurle Villegas
Navigating Insurance Regulations as a Broker
To stay up to date with changing regulations and ensure that they are continuing to meet their duties, brokers are licensed by state insurance regulatory agencies. Their license must be renewed on a biannual basis in most states. Brokers must regularly meet with their clients and review how their current policies are meeting their needs.
Building a Successful Career as an Insurance Broker
Like insurance agents, insurance brokers need a bachelor’s degree, often a background in sales or business, and strong interpersonal and research skills. Because insurance brokers must review contracts on behalf of their clients, attention to detail in contracts and comfort in analyzing terms and conditions are necessary to succeed in this career path.
Although insurance brokers can handle as many types of insurance as they are comfortable selling, becoming an expert in one may be beneficial.
Brokers must be licensed in the state where they practice and pass Series 6 and 7 Financial Industry Regulatory Authority (FINRA)-administered exams. Keeping up to date on changes in insurance laws is a good way to keep clients confident as well.
The amount that an insurance broker makes will often rise as they gain experience and build a roster of clients.
What Is the Difference Between an Insurance Agent and an Insurance Broker?
Brokers represent and work on behalf of consumers, and agents represent and work for insurance companies. Brokers cannot complete a sale of insurance, unlike agents.
Is It Better to Get Insurance Through a Broker?
You can’t usually obtain insurance through a broker, but an insurance broker can help you find a policy that suits your needs. Once a broker has done all of their research and presented their clients with options, the policy selected must be bound by an insurance agent or company. A broker does not finalize a transaction.
What Is the Difference Between an Insurance Broker and an Insurance Company?
An insurance company sells insurance, and a broker seeks to find insurance policies best aligned to the client’s needs and goals.
Is It Cheaper to Get Insurance Through a Broker?
You can’t buy insurance from an insurance broker, but they can help you find the best and most affordable policy.
What Is an Insurance Broker in the United Kingdom?
An insurance broker in the United Kingdom is similar to an insurance broker in the United States. They act as a liaison between their clients and insurance companies.
The Bottom Line
Researching the many types of insurance and insurance companies to find the best policy for your needs can be time consuming and difficult. An insurance broker handles that task and is duty-bound to provide unbiased recommendations to their clients. For their efforts, insurance brokers earn commissions and, potentially, advisory fees. Insurance brokers can’t technically sell you an insurance policy. That is the job of insurance agents, who work on behalf of insurance companies.
