There are two types of people that can sell you life insurance: agents and brokers. Oftentimes, the two terms are used interchangeably, leading to confusion about what the differences between the two are. To make it even more confusing, the answer is, well - not much.
The real difference is whether or not someone works for a specific company or is independent.
Agents that work for one company are often called "captive" or "career" agents. They will only sell life insurance policies from one insurance company. State Farm and Northwestern Mutual are two companies that are well known for using captive agents. The only way you can buy insurance policies from those two companies are through their exclusive agents.
Brokers are typically independent. That means they can sell insurance products, including everything from auto insurance to long-term disability insurance, from a variety of companies.
There are pros and cons to both models. For agents, the biggest upside is knowing the ins and outs of a certain company’s policies. Ideally, captive agents know a company’s policies like the back of their hand. Brokers, however, will be able to shop around and get you the best price on comparable policies.
Takeaway: The labels agent and broker are used interchangeably. Pay more attention to the distinction between captive and independent.
How are they compensated?
There are two major methods of compensation for both agents and brokers: commission-based and fee-only.
Commission-based means that you don’t pay your agent or broker directly. Instead, the insurance company will pay a commission to them for selling you their product. The vast majority of agents and brokers are commission based. These commissions are already built in to the price of your policy, so it doesn’t cost you more to use an agent or broker!
Commissions are already built in to the price of your policy, so it doesn’t cost you more to use an insurance agent or broker.
Fee-only brokers and agents are very rare. If a broker or agent is fee-only, that means you’re paying them directly for their service. They usually charge you an hourly consulting fee, often in the hundreds of dollars, for their advice. Fee-only brokers and agents claim that because you are paying them directly, they are truly independent and won’t sell you a policy that is a bad fit. But good commission-based agents and brokers should still focus on your needs rather than pushing a product, and you should feel free to change agents if you feel you’re being pushed.
By using a fee-only agent or broker, you’re increasing your overall cost because commissions are still built into the price of your policy. You will not get a reduced price policy because you went through a fee-only agent or broker. You are essentially paying for advice that you would otherwise get for free from a good commission-based agent or broker.
Takeaway: Commission-based means the insurance company pays them, fee-only means you’re paying them. Either way, you’re paying for the commission in your annual premium.
What will it cost me?
Insurance prices are regulated by states. Insurance companies determine their rate tables for different risks (age, health, and other specific factors for different types of insurance) and then file those rate tables with state insurance departments. That means that they’re set in stone for everyone - one agent can’t offer you a better price than another agent or a broker for a given insurance policy.
To put it in another way: when you’re applying for a policy from Company X, Company X’s rate tables are used, regardless of who you’re going through to buy that policy. Agents can’t arbitrarily change prices or tack on extra commissions.
When insurance companies create their prices for the year, they factor in costs like marketing and commissions. So even if your fee-only broker isn’t getting a commission from a big insurance company, you’re still paying for a commission in your premium price.
Takeaway: No matter who is selling you insurance from a specific insurer, it will always cost the same to you. Where you can benefit (and where independent agents/brokers bring value) is finding the insurance company with the best-fit product and premium for your specific needs.