A simple guide to understanding how insurance agents earn money through commissions and why it matters when you buy a policy.
When you buy an insurance policy, you don’t just purchase protection—you also work with an agent or broker who helps you understand your options. But have you ever wondered how these agents get paid? That’s where commission comes in.
In the insurance world, commission is the percentage of the premium that an insurance company pays to an agent in return for selling a policy. It’s the agent’s main source of income, and it plays an important role in how the insurance industry operates. Let’s break it down in a simple, everyday way.
What Exactly Is Commission in Insurance?
A commission is a fee that an insurance company pays to the agent who sells you an insurance policy. Instead of paying the agent directly, the company includes this payment as part of its business costs. The commission is usually calculated as a percentage of the premium you pay.
For example, if your policy has a $1,000 annual premium and the agent earns a 10% commission, the agent receives $100 from the insurance company for helping you choose and buy the policy.
This system encourages agents to offer insurance products, provide guidance, and help customers understand their options—all without charging you upfront.
How Commissions Work
Insurance commissions typically come in two forms:
1. First-Year Commission
This is the amount an agent earns when they initially sell you the policy. These commissions are usually the highest because agents spend the most time helping you set up the policy, gathering details, and completing paperwork.
2. Renewal Commission
When you renew your policy each year, the agent may continue to receive a smaller commission as long as the policy stays active. These renewal payments reward agents for ongoing support—like updating your coverage, answering questions, or helping with claims.
Not every type of insurance offers renewal commissions, but many long-term policies—like life or health insurance—do.
Why Do Insurance Companies Pay Commissions?
Insurance companies rely on agents to:
-
Explain complex insurance terms
-
Help customers compare policies
-
Gather application details
-
Build trust with buyers
-
Make sure the company’s products reach the right customers
Since agents do a lot of work behind the scenes, commissions act as their compensation for time, effort, and expertise.
Do Commissions Affect What You Pay?
Many people wonder whether commissions make insurance more expensive. The short answer: not directly.
Your premium won’t usually change based on how much commission the agent earns. Instead, insurance companies factor the cost of commissions into their pricing structure from the beginning. You’re not paying extra because of the agent—you’re paying for the product, and the company handles the agent’s payment separately.
Are Agents Biased Because of Commissions?
Because agents earn money by selling policies, some customers worry that they might push certain products to get higher commissions. While that can happen, laws and industry guidelines require agents to make suitable recommendations that match your needs.
If you ever feel unsure, don’t hesitate to ask questions like:
-
“Why do you recommend this policy?”
-
“What other options are available?”
-
“How does this coverage fit my situation?”
A good agent will explain things clearly and help you make the best choice.
Final Thoughts
Understanding commission in insurance helps you see how the industry works behind the scenes. Agents earn commissions as a percentage of your premium, and it’s how they are compensated for helping you choose, understand, and maintain your insurance policy.
While the idea of commission might sound complicated at first, it’s simply a built-in way for insurance companies to pay their agents—and it doesn’t mean you’re paying extra. In fact, it often gives you access to expert advice at no additional cost.
If you ever have questions about a policy, remember that your agent is there to help—and now you know exactly how they get paid.
Want to explore something else? Here’s another article you might enjoy:
