When you’re shopping for a life insurance policy, at some point or another, you’ll wonder: is this agent costing me something? Sure, they say their advice is free, but are you paying more for life insurance because you’re using an agent? Would it be cheaper to buy directly from an insurance company?
Are life insurance policies more expensive if you buy them through an agent?
The short answer is: no. Agents and brokers make money through commissions from life insurance companies. These commissions are decided upon in a contract between the life insurance companies and the agent. These commissions (as well as every other expense the life insurance company incurs by insuring you) is already baked into the cost of your policy (your premium).
You read that correctly – agent and broker commissions are built into the price of your policy, regardless of whether you use an agent or broker. The cost of paying out a commission to agents is spread out across every policy. This is how insurance policies work: costs and risk are spread out among a large group of people in order to drive down prices for everyone.
Do some life insurance companies give better commissions than others? Will that affect my agent’s recommendations?
For life insurance companies that are A-rated, the range in agent commissions is rather limited. They'll usually pay the same rates to agents. The bigger difference is between companies that are A-rated and B-rated – A-rated companies usually pay higher commissions. This works out well for consumers because agents are incentivized to push consumers towards better, more trustworthy products.
If Agent A makes less of a commission than Agent B on the same policy, does that mean I pay less?
No - that's because Agent A will make the same commission as Agent B on the same policy. As described above, these commissions are already baked into the cost of your policy. How can you be confident that Agents A and B are quoting your policy correctly and aren't doing any 'funny business' with their commissions? Well, fortunately for consumers, insurance is heavily regulated by the states. Each life insurer has to submit their pricing tables to the state regulators, and all agents have to quote from these tables. Agents can't discount or adjust the rates; they have to use these tables.
These pricing tables are complicated and impressive matrices, designed to cover the total risk that the life insurance company is taking on, plus pay for marketing, plus pay for agent and broker commissions, plus make a profit for the company.
So, to make a long story short: no matter what your life insurance company has decided to give your agent as a commission, you will be charged the same amount in premium.
If I buy directly from an insurance company, will I get a cheaper policy because they don’t need to pay a commission?
No. The same regulations that apply to agents and brokers apply to insurance companies. That means the insurance company has to quote you from the exact same pricing tables that agents & brokers use. This is to make the process easier for consumers.
It also would not be in the interest of life insurance companies to sell their policies directly at a discount, due to the spread of risk outlined above. If less people put money into the pot that pays for commission, commissions become unaffordable, agents don’t get paid, and agents stop selling that company’s products.
It’s also not necessarily in the interest of the consumer to get rid of these commissions. For starters, anyone who is looking for a life insurance policy can get free expert advice from a licensed life insurance agent or broker. Even if the consumer gets a small policy, agents and brokers can give them a lot of individual attention.
Independent agents and brokers can compare quotes from a wide variety of companies, finding you the best price across all of them. Which brings us to an important distinction: the pricing table for a given insurance company doesn't change, but they're different across insurance company. Put another way: a MetLife policy will always cost you the same regardless of who you buy it from, but will be different than the cost of a Prudential policy. As an example of why this is important, let’s say you recently quit smoking but you’re still using a nicotine patch. Some insurers look more favorably on this than others, which means they will give you a significantly cheaper policy. If you were to call up each one of those companies and attempt to get a quote, it would take an untold amount of hours. In the end, using an independent life insurance agent or broker saves you both time and money.
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