The nuts and bolts of independent insurance agent commission rates

One of the most iconic one word movie quotes ever uttered comes in the film Braveheart. William Wallace, portrayed by Mel Gibson, shouts the heroic word “freedom” which ultimately leads to his beheading.

While the movie cameras aren’t rolling and the end results are thankfully not the same, many insurance agents also choose ‘freedom.’ They sever ties with insurance companies, possibly giving up the security of a set paycheck and regular cost of living pay increases, to become independent agents.

Independent insurance agents aren’t paid a salary but are paid on a commission structure when they sell a policy. Depending on the type of policy sold, they receive an agent's commission. 

According to the U.S. Bureau of Labor Statistics (BLS), the median average salary in 2021 for insurance sales agents was $49,840, with a required entry-level education of a high school diploma. The growth of the field doesn’t appear to be slowing down as the BLS estimates the growth rate for the occupation to be about 6 percent between 2021 and 2031.

If you are considering a career in the insurance industry, this blog will help you to dig deeper into the insurance agents earning potential.

If you are a captive agent who is considering freedom by becoming an independent agent, now is a great time to download our free ebook: How to Transition from a Captive to Independent Agent.

Who makes the most?

As with any successful business, the business owner will make more money than an employee. However, early on, the agency owner will most likely use most of their earnings paying the bills needed to keep the doors open while they build their book of business. A positive is that they can decide what type of insurance agent they want to be and what type of policies they want to offer.

An agent who works for someone else’s agency doesn’t have to worry about making sure the business’ bills are paid. They can begin earning as quickly as they sell a policy. However, their commission will likely be split with the agency owner and possibly other staff who help with the sale.

How do independent agents’ commission rates differ from captive agents’?

Types of agents include captive and independent agents and their earnings vary considerably. 

Captive agents usually sell for a single insurance company. This role is a great way for new producers to gain experience. Insurance agents salaries are often paid by the company and may be supplemented with a small commission, possibly in the 5 to 10 percent range.

While it’s harder to become an independent agent, the position offers the freedom to sell to who you want and choose the products you wish to offer. To establish yourself as an independent, you need the experience to prove you have sold a lot of policies in order to get contracts with different insurance companies. As an independent agent, you will likely have to meet various company’s requirements but you will also have greater flexibility. You can expect higher commissions, up around 15 percent, but you incur all of the associated risk. 

Insurance agents are typically paid one of two types of commissions which are a percentage of the total insurance premium. Depending on the types of insurance, they will either be paid a residual commission, a smaller commission paid at the initial sale and subsequently each year at renewal, or an upfront commission, a single larger payment paid when the policy sells. 

Let’s Look at Where You Can Earn the Highest Commissions

As mentioned earlier, commission is usually paid on either a residual or upfront basis. Residual commission is usually paid on property and casualty such as home, business and auto insurance. Insurance agent commission rates range from 7 percent to 20 percent per policy. The percent commission for renewal of the annual premium is usually a bit less than on the original sale.

Upfront commission is most often seen with life and health insurance sales agents. The bulk of their commission is paid upfront at the time of the sale of the insurance policies. Some life and health insurance carriers may also pay a renewal commission but at a much lower percentage than property and casualty insurance products.

If you’re looking for the highest commissions paid in the first year, a life insurance policy is most likely your best bet. Commissions for life insurance can begin at 75 percent and go up. However, being a life insurance agent requires continuous selling as renewal commission drops to about 5 percent or less.

Commercial insurance can also earn you annual commissions of 10 percent to 25 percent. The riskier the industry or coverage, the higher the premium and commission percentage.

Direct Appointment Yields the Best Commission Rates

Direct appointment with a carrier means you’re authorized to act on its behalf as an agent. To be licensed by the state, you must be appointed by at least one insurance company. As a direct appointment, you gain 100 percent of commission but it requires a minimum volume to begin earning.

You may opt to join a cluster which is basically a formal group of insurance agencies that provide mutual support and group benefits. If you do, be prepared that it’s up to the cluster to decide profit sharing but you can often earn profit sharing on smaller amounts of premiums and with no minimum premium at all. The premium is aggregated so that the group can withstand loss, but still earn profit sharing due to the volume of the aggregated premium.

While it may be upsetting to not gain 100 percent of your hard earned commissions, the alternative is that you earn nothing when business is poor. Again, as we discussed before, independent agent life is inherently more risky. 

In Closing

We’ve talked about how commission rates are calculated, how they’re different for captives vs. independents, which industries pay the best, and direct appointment. So what does it all mean?

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it boils down to the individual’s tolerance of risk and goals in life. While a decision to transition to an independent agent won’t get you beheaded like William Wallace, you do need to be prepared for the associated risks that come with striking out on your own and know how an independent agent works. SIAA is here to help you gain your independence. We are offering a free ebook to get you started. Simply click the link How to Transition from a Captive to Independent Agent.