How Insurance Brokers Get Their Paycheck

Concerning the commission payment for the insurance advisors, it doesn't make a difference if they are captive (working for just one company) or independent (for multiple companies), as all of them get their commission when an insurance policy is activated. I asked Lorne Marr, Canada life insurance broker, for an opinion: "If you decide to cooperate with an insurance advisor, there are two important advantages for you: you can get the best premium on the market, and the broker will help you to choose the optimum type and amount of coverage for your situation."

It's crucial to note that the agent/broker is paid by the insurance company. Nevertheless, the media and consumer scepticism has done a lot to create misunderstanding. We will describe the main points that are most commonly misunderstood regarding the whole payment process.

"Life insurance commissions drive up the cost of the policy."

Life insurance policies may be sold either via salaried employees or self-employed agents, but regardless of this, there are always certain distribution costs. With the price of the insurance policy, you already pay also the price of distribution. Companies that use multiple distribution models for the same life insurance product, e.g. RBC Insurance or Manulife, charge the same premiums regardless of how the customer buys the policy. A $200,000 Term 10 policy from Manulife will be the same rate whether the policy is bought via their call centre, website, or an independent broker.

"You can negotiate the life insurance commissions."

Life insurance commissions are not negotiable. The situation is different from when you are buying a car or a home. Only to repeat what we have said already, the commissions are counted in the insurance distribution costs and it's not possible to change them.

"Whole Life or Universal Life insurance pay higher commissions than Term Life insurance."

The life insurance commissions are based mostly on the policy price. So the broker gets more money for a more expensive policy. If you buy a Whole or a Universal insurance, you will have to pay a higher price than for a Term policy, but on the other hand people buy the Whole or Universal policies just once. In case of a Term policy, the cost increases with the progressing age of the insured person, thus multiple policies of this type are needed during his/her life. Each time a new policy is bought, a commission is paid, but more importantly to the consumer, each time a policy is bought the applicant is older, so they're paying a higher price. The insurance premium also depends on the health condition of the applicant - in case it has changed, the premium will increase or the coverage won't be available. The applicants should always understand how the different life insurance policies are structured so that they will be able to decide how much life insurance they need.

"The height of the commission depends on the insurance company - some pay more than others."

The truth is that the differences between commission rates from different companies are only slight. But anyway, this shouldn't influence the consumer's decision, as insurance commissions are a fixed cost within the policy. Some advisors are independent but they just work with two or three insurance carriers. So make sure you find one that works with multiple companies.

Alec