How do life insurance agencies make their profit?

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Monica Sandler asked:


I have a few questions here and thanks in advance.

Can anyone please explain how do life insurance agencies (or financial advisory agencies) make their profit?

Is that true that the life insurance companies are paying around 100% of total first year premium to the agents? How do the agencies split that with the agents?

I would appreciate if you can throw in some numbers, since i am looking to invest some angel capital into an agency, so you would help if you give numbers.

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4 Responses to 'How do life insurance agencies make their profit?'

1. Powered By Yahoo Answers - October 14th, 2009 at 5:49 pm
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   Life insurance agencies make their income from selling policies. Yes, it’s usually to receive a first year commission of 100% of the premium. Agencies usually split commissions roughly 50/50 with producers.

   95% of producers/agents wash out – they can’t make it the first year. It’s really, really hard to produce, and KEEP producing.

   And I’d strongly suggest if you have no agency experience, you shouldn’t be investing in the agency.

2. Powered By Yahoo Answers - October 16th, 2009 at 5:35 am
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   Agencies make their money from First Year Commissions (FYC) on new policies, and renewal commissions and service fees on policies which have been on the books beyond the first year.

   If an agent works for an established agency, he/she will get paid a percentage of the total FYC. The total FYC could be anywhere between 40%-120%, depending on the insurance companies the agency represents, and what type of policy is being sold. Health policies pay a lot less than life insurance policies.

   Of the total FYC, the appointed sub-agent would receive anywhere between 50% and 90%, depending on the sub-agents contract with the agency. Most agencies will pay advance commission on 75% of the sub-agent’s FYC.

   Example:

   Let’s say that the sub-agent writes a life insurance policy, and the annualized premium is $1200. ($100.00 per month). Let’s assume that the agency’s FYC is 100%, and the sub-agent’s FTC is 80%. The agency’s FYC would be $1200, and it’s advance would be $900 (75%). The sub’s FYC would be $960, and the advance would be $720 (75%). The balance would be paid as earned on the final 3 last payments of the first policy year premium. If the total ANNUAL premium was paid initially with the application for the same policy, it would be a little less than $1200, around $1162 give or take. ALL FYC would be advanced in this case.

   Once the policy is in force for 12 months, renewals and/or service fees will be paid, 2-20%, depending on the carrier, and the sub-agent would get his/her percentage of that. (I had a company that paid $100% FYC and 20% renewals)

   Some companies pay bonuses, based on your total production and persistency rate, the percentage of business that stays on the books.

   If you work for an insurance company as an employee/captive agent, your commission rate will be somewhat less, but your benefits will make up the difference, such as company-paid retirement, 401K, health and life insurance. In this case, your commissions would be put in a commission pool, and you would draw from that on a weekly or bi-weekly basis. When you initially start selling for one of these companies, you are on a guaranteed salary for a specified period of time, while you build your commission pool. Some of these types of companies will guarantee your salary, (based on production quotas), for up to three years, on a depreciating basis.

   After the first year, you start earning renewals/service fees. Let’s say that over time, you build up your book of business to $500,000 of life insurance annualized premium, and your renewals are 3%. Your base pay would be $15,000, plus your FYC and bonuses.

   Some of the captive companies will offer you an established book of business, with renewals and service fees. It’s possible to be offered an agency which is paying $300-$500 or more per week, which would either go into your commission pool, or be paid as part of your initial guaranteed salary. If you are assigned to an existing book of business, you have all those policyholders as potential prospects for new business, along with their family members and other people they know.

   Here are some names of companies that have guaranteed starting salaries: (Not in any particular order)

   New York Life, Met Life, Monumental Life, American General, American National, Western-Southern Life, Prudential, Liberty Life.

3. Powered By Yahoo Answers - October 18th, 2009 at 5:28 pm
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   They make their profit from the premiums. Imagine getting money from 1000 people yearly and yearly only having to pay one or two people (who die) off.
   They base their premiums according to life expectancy statistics, that’s the underwriter’s job to analyze it all.
   There’s an orcanization I believe in Chicago that holds your data for 7 years if you ever apply for life insurance and they pass it on to carriers on demand.

4. Powered By Yahoo Answers - October 19th, 2009 at 3:53 pm
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   I would NOT invest money in an insurance agency unless I was running the agency.

   They make their profit off of selling insurance policies.