What’s the difference between an insurance agent and insurance broker?
There are basically two ways people buy insurance, through an insurance agent or through an insurance brokers. While the two terms are often used interchangeably, they are not the same.
Insurance agents generally work as ‘captive’ employees with one company. You can only buy their company’s policies through an insurance agent representing that company. Examples include state farm, allstate, nationwide and northwestern Mutual. They encourage people to buy insurance policies from their company for obvious reasons.
An insurance brokers on the other hand is independent. They can be help you get insurance quotes and buy an insurance policy many different insurance companies.
In theory, an insurance agent may know their company’s insurance policies because that’s all they sell. An insurance broker can help you shop around and compare insurance policies in terms of costs, features and benefits.
How are insurance agents and brokers paid?
There are two ways insurance agents and brokers are paid, commissions or fees.
Generally, an insurance company will pay a commission to the person who sold you the policy. The compensation is part of the policy premium. There is no additional fee to you, so whether you use an agent or broker, the cost may be similar.
Fee-based insurance agents and brokers are paid a consulting fee for their services. In theory, they won’t sell you a policy that is a bad fit, but in reality, commission paid agents and brokers put your needs before theirs, so they shouldn’t be promoting one product over another.
Using a fee only planner wouldn’t make much sense if they also are paid a commission by selling a policy that pays them a commission! You are buying advice that you could get without a fee from a good commission-based agent or broker. Long story short is that virtually all policies pay a commissions to the person you buy it from!
How are the insurance premiums determined?
Insurance prices are regulated by each state. The insurance companies determine their rates using actuarial tables that adjust the cost for different risks such as age, health, and other factors. They have to get approval from each state for their rates through a filing process so an agent or broker will offer the same price as any other agent or broker. In most states it is illegal for an agent or broker to reduce the commission, also known as rebating. In other words, they can’t change prices up or down.
Insurance companies also have costs for things such as marketing and corporate taxes.
The most important thing is that you work with someone who can help you get the optimal insurance at a premium to meet your personal needs.