The most significant and potentially advantageous aspect of a career as an insurance agent involves the payment of commissions. The bulk of an insurance agent’s earnings come from commissions received on the sale of new policies. While each type of policy pays a different commission, the manner in which those earnings are generated remains the same throughout the industry.
Almost every type of insurance policy pays the selling agent an upfront commission, which is a percentage of the premium paid by the policy owner. Automobile insurance policies typically pay agents a commission between 10 and 15 percent, and life insurance policies pay between 75 and 90 percent. The size of an agent’s commission varies based on the insurance company providing the policy and the selling agreement with that same carrier.
Residual earnings, often called “trails,” give agents the ability to generate an income that increases every year and potentially lasts forever. Insurance policies pay the selling agent additional commissions on the contract anniversary date every year for as long as the policy remains in force. Automobile insurance policies typically pay commissions that are on par with the amount paid at the time of the sale. Life insurance policies, however, typically pay commissions ranging from 1 to 3 percent.
Some types of insurance do not pay agents an up-front lump-sum commission. Instead, agents earn a small commission every time a customer pays a premium. Health insurance policies, for example, generate commissions between 4 and 6 percent, resulting in a consistent and predictable monthly income to the agent who sold the policy.
The potential downside to large upfront commissions, as opposed to earned compensation, occurs when customers cancel coverage or otherwise terminate the policy within the first year. If this happens, insurance companies reverse the payment of commissions to the agent. Depending on the particular insurance company contract, the chargeback amount may be immediately deducted from the agent’s checking account, or listed as a deduction on future earnings.