Commission (Insurance)
The percentage-based payment that insurance agents and brokers receive from insurance companies when they sell policies to customers. This compensation structure means agents earn money based on the premiums of the policies they sell, typically ranging from 5% to 20% depending on the type of insurance.
Example
“The insurance agent earned a 12% commission on the $2,400 annual auto insurance premium, receiving $288 for selling the policy.”
Memory Tip
Commission = 'Come-and-mission' - agents complete their mission of selling insurance and money comes to them as payment.
Why It Matters
Understanding commission structures helps consumers recognize potential conflicts of interest, as agents may have financial incentives to recommend higher-premium policies or specific insurance companies. This knowledge empowers consumers to ask better questions and seek truly independent advice when purchasing insurance.
Common Misconception
Many consumers believe insurance agents work for free or are paid directly by them, not realizing that agents typically receive substantial commissions from insurance companies. This can create situations where an agent's financial interest in selling a particular policy may not align perfectly with the customer's need for the most cost-effective coverage.
In Practice
An insurance agent sells a whole life policy with a $5,000 annual premium and receives a 50% first-year commission of $2,500, plus 5% renewal commissions of $250 annually thereafter. Compare this to term life insurance with a $500 annual premium earning only a 15% commission of $75 annually, illustrating why agents might push more expensive permanent life insurance products.
Etymology
From Latin 'commissio' meaning 'a bringing together' or 'entrusting,' reflecting the agent's role as an intermediary who brings together insurers and customers.
Common Misspellings
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Related Terms
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See Also
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