How Does an Insurance Broker Make Money?

An insurance broker is a professional who acts as an intermediary between a consumer and an insurance company, helping the former find a policy that best suits their needs. Insurance brokers represent consumers, not insurance companies; therefore, they can’t bind coverage on behalf of the insurer. That’s the role of insurance agents, who represent insurance companies and can complete insurance sales.

An insurance broker makes money off commissions from selling insurance to individuals or businesses. Most commissions are 2% to 8% of premiums, depending on state regulations. Brokers sell all insurance types, including health insurance, homeowners insurance, accident insurance, life insurance, and annuities.

How Insurance Brokers Make Money

The primary way that an insurance broker makes money is from commissions and fees earned on sold policies. These commissions are typically a percentage of the policy’s total annual premium. An insurance premium is the amount of money that an individual or business pays for an insurance policy.

Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Insurers use premiums to cover liabilities associated with the policies that they underwrite. They may also invest in premiums to generate higher returns and offset some of the costs of providing the insurance coverage, which can help an insurer keep prices competitive.

Insurers invest the premiums in assets with varying liquidity and return levels, but they are required to maintain a certain level of liquidity. State insurance regulators set the number of liquid assets necessary to ensure that insurers can pay claims.

An insurance broker or agent will often earn a lump sum percentage against the first-year premium of a policy that they sell and then a smaller but ongoing annual residual income payment over the policy’s life.

Other Methods to Make Money

Brokers also make money by providing consultative and advisory services to clients for a fee. In certain circumstances, transactional fees can be charged. For instance, brokers can charge fees for initiating changes and helping to file claims.

States govern how and when brokers can charge fees. When permitted, the fees must meet certain criteria, such as being reasonable and agreed upon by the client and broker.

Controversially, some insurers incentivize brokers who perform well by paying bonuses or increased commissions. The compensation is often based on past performance and is used as motivation to continue certain behaviors that generate revenues.

However, because—in their clients’ best interest—brokers do not represent a specific company, this method of earning commissions is often frowned upon.

Representing Clients

The broker is employed to represent their clients’ best interests. Part of the broker’s duty is to understand the clients’ situation, needs, and desires to find the best insurance policy within their budget. Choosing the right insurance plan can be complicated, and studies show that many people choose a less-than-optimal plan when they rely solely on their own judgment.

Besides being well-versed on offerings from all insurance companies, brokers should not favor any specific company. As a result, brokers are paid a commission rather than receiving payment from insurance companies, as the latter could create negative incentives that damage trust between the broker and the client.

A broker has an important responsibility to help people navigate among insurance plans, many of which have subtle differences. In addition to connecting clients to the right policy, the broker continues to have obligations to their clients.

Insurance Regulation

To stay up to date with changing regulations and ensure that they are continuing to meet their duties, brokers are licensed by state insurance regulatory agencies. Their license must be renewed on a biannual basis in most states. Brokers must regularly meet with their clients and review how their current policies are meeting their needs.

Insurance Broker Career Path

Like insurance agents, insurance brokers need a bachelor’s degree, often a background in sales or business, and strong interpersonal and research skills. Because insurance brokers must review contracts on behalf of their clients, attention to detail in contracts and comfort in analyzing terms and conditions are necessary to succeed in this career path.

Although insurance brokers can handle as many types of insurance as they are comfortable selling, becoming an expert in one may be beneficial.

Brokers must be licensed in the state where they practice and pass Series 6 and 7 Financial Industry Regulatory Authority (FINRA)-administered exams. Keeping up to date on changes in insurance laws is a good way to keep clients confident as well.

According to Payscale, as of July 17, 2022, a mid-level insurance broker’s median salary is approximately $75,000 a year. However, this amount will often rise as an insurance broker gains experience and gathers clients.

The Bottom Line

There are so many types of insurance and insurance companies that it can be hard to do sufficient research in order to make a wise choice for your needs and budget. An insurance broker takes responsibility for the research and helps guide their clients to make the right choice, earning a commission in the process. While insurance brokers can’t technically sell you insurance, they work on behalf of their clients to find the best choices for their needs.