Calculating Commission Rates as an Independent Insurance Agent

Commissions are the lifeblood of insurance agents. They are what ultimately determines how much you earn, especially if you’re an independent agent.  Almost all insurance agents earn a commission of some sort, though how they are earned and at what rate can vary greatly. There are a number of different factors that go into determining what commissions an insurance agent earns.  Below is a description of calculating commission rates as an independent insurance agent. 

How Insurance Commissions Work 

The first thing to understand is how commissions work for independent insurance agents versus captive agents.  Captive agents work directly on staff for an insurance carrier. Their job is to sell the various insurance products that that carrier sells.  Their compensation is determined in a few different ways. They typically earn a base salary and benefits, and can earn more money through commissions based on their sales and renewals.  Independent agents, by contrast, work for themselves and must contract with individual insurance carriers to be able to sell their products. This gives them extra freedom in terms of being able to offer only the insurance products they want from a variety of different carriers instead of just one.  Commission rates are typically higher for independent insurance agents, though they don’t have the stability of a base salary or benefits.  

What Determines the Commission? 

For independent insurance agents, commissions are based around the premium that’s charged for the insurance policy. The standard rate is what’s called the base commission. It’s essentially a straight percentage of what the total premium for the insurance policy is.  For example, if the standard rate is 10% and the total annual premium for the insurance policy is $1,000, independent insurance agents will earn $100 in commission for selling that policy.  How much the standard rate will be will vary based on a number of factors — the policy type, the risk level and the amount of coverage selected, among other things. In addition, some insurance carriers will pay different commission percentages than others. 

How Are Commissions Paid? 

Independent insurance agents are paid their commissions in two main ways.   The first is called a residual. In this form of payment, independent insurance agents receive a commission when they sell a new insurance policy. Then, they’ll receive another commission payment every time that the policy is renewed.  The initial commission typically is a higher percentage than the renewal commission. This type of commission structure is commonly used for auto and health insurance policies, which have annual or bi-annual renewal periods.  The advantage of this type of commission is that it helps to contribute to an independent insurance agent’s short- and long-term income.   The other method of commission payment is called upfront. For this type, a commission payment is issued at the time that a new policy is sold.   This type of commission payout is used commonly for annuities and life insurance, as they don’t have the typical renewal period as the other policies. While the upfront commission doesn’t typically provide consistent long-term income, it does provide a more substantial payment at the time of sale.  Independent insurance agents can make a solid business out of either commission structure. 

How to Calculate Your Commission Rate 

To calculate your commission rate as an independent insurance agent, you need to gather all the information that’s provided to you by the insurance carriers with which you work.  First, you’ll need to determine what your base rate commission is from each of the insurance companies you work with. This should be provided to you on a rate sheet by each.  Next, determine whether you have an override. This is additional commission you might be paid for marketing and/or overhead. Override may not be typical for independent insurance agents, though, especially if you’re just starting out.  Finally, you can use all of this information to calculate what your commission rate will be. Take your base commission and multiply that by the premium that’s paid on the insurance policy you sold.  If you have an override, multiply that amount by the premium as well. Take the amounts of both of those calculations and add them together to get the final amount you will earn in commission.  This same basic formula can be used for every insurance policy you sell from any insurance carrier. Keep in mind, though, that what the different inputs will be — i.e., the base rate, premium, etc. — may vary based on each individual insurance carrier with which you work.   By knowing how to calculate commission rates as an independent insurance agent, you can understand how your compensation works and can even more effectively and efficiently sell the different insurance products you offer. 

Discover the Good Life

At Good Life Insurance Associates, our experienced insurance sales associates are here to provide support and training for both new and experienced agents. To learn more about us, remember to explore our business support services. Or, to speak with a member of our team about your journey to becoming an independent agent, contact us today!

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply