How Does Residual Commission Work?

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Insurance agents, investment representatives, writers and people involved in various types of sales jobs often receive some or all of their compensation in the form of residual commissions. Commissions are wage payments that individuals receive for doing a certain amount of work or for completing a certain number of sales. While some people receive commission payments in a lump sum, people who receive residual commissions receive a series of payments over a period of time.

Commission

  • When you sell a product or service, the buyer may have to pay for that product or those services with a single premium. Therefore, your employer may pay you a one-time commission payment from the sale proceeds. However, if you sell a service contract or an insurance policy, then the buyer may have to make a series of premium payments over the duration of the contract term. If you receive a residual commission, you receive a small commission every time that the contract buyer makes a payment.

Residual Income

  • If you receive a significant amount of your income in the form of residual commissions, you can gradually decrease your workload because you continue to receive income from past sales even if you have made no sales within the current pay period. You may reach the point at which you can support yourself entirely on residual income. However, depending on the nature of your employment, your commission payments may end when you quit your job. In such instances, you have an incentive to stay at your current employer and residual income payments enable employers to keep hold of long-term employees.

Chargeback

  • Some insurance firms and other companies allow you to decide whether you want to receive your commission in a lump sum or as residual income. If you request a lump sum payment, your employer may have the right to chargeback your commission if the contract that entitled you to your commission comes to a premature end. With life insurance contracts, some providers chargeback sales commissions up to two years after the contract issue date. If you choose to accept residual income, you do not have to worry about chargebacks because you only get paid when the buyer makes a premium payment.

Other Considerations

  • While you avoid chargebacks when you accept residual income, you may struggle to cover your day-to-day expenses in the short-term if you only receive small monthly residual commissions. Furthermore, employers do not usually have the right to chargeback commissions after you leave a company. This means that someone could potentially make significant sums of money by job-hopping, while if you stay at one employer for too long, you may end up earning very little if your clients cancel contracts or move their accounts elsewhere. Furthermore, some firms reserve the right to end your residual income by providing you with a lump sum payment at any time during the contract term. Therefore, your residual income may end even if the contract that you sold remains active.

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