How Do Insurance Agency Commission Structures Work?

How do insurance agents get paid? If you’re considering a career as an agent or broker, you may find this a captivating question. But even if you’ve been in the business for a while, you may not be completely sure how the commission structure of your agency works.

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Why? Because there are few standards. Every agency has its own structure, which is likely to vary based on the type of insurance sold—a new workers’ comp policy, for example, is likely to pay a different commission than a life insurance policy. State regulations and agency size and profitability can also play a role.

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In the end, you may receive commissions based on wildly different numbers that require way too much time to figure out.

In this article, we’ll look at the common types of commissions, the factors that influence them, and the strategies you can use to negotiate favorable higher commissions.

How are Commissions Structured at Insurance Agencies?

Although every agency is unique, several common types of commission payments are used for producers in the insurance industry. Keep in mind that there are two types of agents: captive agents, who work for a single insurer, and independent insurance agents, who may sell policies for a range of carriers. 

A captive agent is often paid on a salary basis, but not always. Independent agents, too, may be paid in a variety of ways, including with premium-based commissions.

Upfront and Residual Commissions

An agent may be paid solely based on what they sell. An agent who works on a straight commission receives a percentage of the premium cost of the policies they sell. 

Usually, this includes a sizable upfront commission at the beginning of the policy and residual commissions if the policy is renewed. The percentages vary depending on the product.

If an agent sells a workers’ comp policy, for example, the agency receives a percentage of the total premium as a commission, often around 10 percent. The agency may take some of that amount to pay for extraneous costs, such as clerical workers, IT needs, or account managers. 

They then allocate the rest to the agent who sold the policy. If the policy is renewed at the end of the term, the agent may get a residual payment, which is likely to be smaller.

Life insurance agents, meanwhile, tend to receive a larger initial commission from the first-year premium because life insurance is a long-term product. Meanwhile, property and casualty insurance agents receive a smaller percentage upfront, with a residual payment each time the policy renews.

Salary Plus Commission

Some insurance producers, especially those who work for larger agencies, earn a steady salary with a smaller commission when they make sales. 

If the average commission rate for an insurance sales agent on commission is 10 to 20 percent of the premium cost, for example, salespeople with a salary plus commission might earn a base salary of $40,000 plus a 6 percent commission on sales. 

Captive agents are more likely to be paid at least in part with a salary, while independent agents frequently work solely on commission. 

The drawback? Even if you hustle and bring in big sales, earning significantly from those sales will be harder. A straight salary, or a salary plus commission, is thus a better bet for new agents who haven’t yet learned the strategies that allow more seasoned agents to earn a high sales commission.

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Bonus Commission

A bonus commission is a fixed amount you earn whether you are salaried or working on commission. It’s set up by your insurance agency owner and is based on bringing in a certain level of new business over a period of time.

So, for example, if you sell $40,000 worth of annuities in a single quarter, you might earn a bonus commission of $1,000. This is in addition to your regular salary and/or commissions.

Straight Salary

According to the U.S. Bureau of Labor Statistics, insurance sales agents working on salary make a median pay of $49,840 a year, which works out to $23.96 per hour. This varies based on the type of insurance being sold, however. 

Insurance brokers and agents who sell health and medical insurance make a median pay of $70,570, while those working for direct insurance carriers, except for life, health, and medical, make $57,990. 

If you are selling workers’ comp policies, you can expect to make an estimated median salary of $64,871 annually, according to Glassdoor.

Even if an agent is working entirely for a salary, however, they may still earn bonuses. This can help an agent increase their bottom line even if they are not making an insurance agent commission.

Contingent Commission

Contingent commissions, according to the International Risk Management Institute (IRMI), are commissions paid by an insurer or reinsurer to an agent who places a large volume of business with them—possibly a substantial part of their book of business. 

If these policies are at a lower risk of claims, the contingent commission is higher than if they are higher risk of claims.

Contingent commissions are somewhat controversial because they may lead to a conflict of interest. The agent or broker looking for a contingent commission may not have their client’s best interests at stake. 

While not illegal, contingent commissions are considered by some to be unethical.

How to Calculate Your Commission

Once you know your insurance agency's commission structure, calculating your commission is pretty straightforward. To determine your commission rate, try this:

• Find out your base commission. Your agency should have a rate sheet that has that information.
• Do you have an override? This is an optional commission you are paid for your expenses, such as marketing. 
• Take the premium you received through an insurance sale and multiply it by your base commission. If you get an override, multiply that number by the premium as well. Add the two numbers together to get your commission.
  

Factors that Influence Commissions in Insurance

How does an agency determine its insurance commission/salary structure? There are several factors they consider, including:

• Type of insurance sold: Different insurance products have different commission structures. Life insurance, for example, tends to have a higher upfront payment compared to other insurance types, like property and casualty or workers' comp. That's because life insurance tends to be more long-term.
• Industry norms and regulations: Every state has an insurance commission that licenses agents and companies. Regulations may include rules on how agents are paid, what structure (commission or salary) they use, and the commission percentage they may earn. These regulations are likely to differ depending on whether you are selling term life insurance, vehicle insurance, or workers’ comp policies.
• Company size and profitability: A larger, more stable company, or a company that has a high rate of profitability, may offer increased financial benefits to agents. These may come in the form of a higher commission or a bonus commission for sales goals met. For example, an agent who brings in 50 new policyholders each quarter, or $50,000 in new sales, might earn an additional payout of $5,000 on top of their regular commissions.
• Agent experience and performance: More experienced agents tend to earn a higher salary than those just starting in the business. They are likely to have a larger book of business, a more advanced plan for lead generation, and experience in a more diverse portfolio of insurance products.
• Client needs and preferences: Of course, the needs of the policyholders for an insurance plan also play a role, especially for agents working primarily on commission. A client who needs a $10,000 policy, for example, is probably not going to earn the agent as much as someone with a million-dollar universal life policy that includes a high annual premium.

Strategies for Negotiating Your Commission

In many cases, your commission isn’t written in stone, and there may be room for negotiation. This is especially true if you work for an independent insurance agency rather than as a captive agent employed by a particular insurance company that may have company-wide statutes it adheres to. 

Here are a few ways you might be able to increase your commission:

• Research industry norms and company policies: What is the usual operating procedure in your insurance business? If you are a captive agent for a large carrier, you may want to ask your HR people what the company standards are for commissions. Understand industry benchmarks to help you negotiate from an informed position. If there is a range, where do you currently fit, and how can you increase your rate? Talk to other agents and see if any of them will share their own commission experiences with you. In a smaller agency, talk to your manager about what the company typically offers.
• Highlight past performance and experience: If you’re a high achiever who brought in a large number of insurance premiums to your agency, you can leverage your track record, highlighting sales achievements when negotiating your salary. You don’t need to spend your days trumpeting your successes in the office, but it’s a good idea to ensure that your manager or agency owner is aware of your work.
• Emphasize client satisfaction and retention: It’s also important to show that you can not only earn new clients but that you’re skilled at maintaining them for the long term. Your residual commissions are usually not as large as the initial payment, but they aren’t nothing, either. They bring in value both for your bottom line as well as your agency’s.

Understand Your Worth to Earn the Best Commission Structure from Your Agency

As we have seen, there is little that is standard when looking at insurance agency commission structures. Multiple factors, from state regulations to the type of policy you’re selling, make a difference in how you will be paid.

What is standard, though, is this: effective communication, negotiation skills, and a clear understanding of your worth are key factors when negotiating favorable commission structures.

Now that you understand how commission structures work, all that’s left to do is assess your own situation to determine if you can make changes in your favor.