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Agent Commission in Insurance

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insurance agentYou would remember your childhood days when a person sitting in the drawing room kept explaining about the benefits of life insurance policy to your father. Although, sophistication has led to more and more people switching to online route for insurance policies, the concept of Insurance Agent is very much present till date.

Meanwhile, there are certain facts that you would like to consider before buying an insurance policy. The commission of the agent is fixed on the premium you are paying or would pay for your policy. The amount of commission varies according to the years of the policy.

Commission is Recurring in Nature:

The rate of the agent commission in insurance is based on the premium allocation charge that an insurer pays. This charge is also recurring in nature, which means that the amount of commission is deducted on the basis of each and every premium that is paid.

Difference between Broker and Agent Commission:

There is a fine line of difference in purchasing a policy from a broker or an agent. This needs to be understood from commission point of view as well. The commission of the broker is lower as compared to the insurance agent. For example: For a Endowment Term Insurance policy that is of 10 years or more, the commission is 30% for broker while the same can extend up to 40% for an agent in the first year. (Policy commission has been discussed in the table below).

It is worth noting here that taking a policy from the agent is a costly option compared to taking it from the broker. This is because the later has got more plans from various companies compared to an agent. An agent might be working under one banner and tries to sell a particular product, which gives him maximum benefits.

Commission types and charges:

Upfront Commission and Trail Commission are generally charged from the client. As the name suggests, upfront commission is the commission charged for the first year of the policy term, any subsequent commission is known as trail commission.

Insurance PolicyLife of The Policy Upfront CommissionTrail Commission after Upfront┬
Endowment PlanBetween 5-9 YearsVaries from 15-25%7.50%
Endowment PlanMore than 10 YearsUp to 40%5%
ULIP PlanRegular Premium20-40%2%

Source: Companies websites, IRDA

However, the above mentioned rates are expected to reduce as IRDA has asked alternatives from the life insurance companies to reduce the burden on the customers. This is expected to result in the decline of insurance commissions, benefitting the customers at large.  The rates also vary depending on the Client-Customer relationship.

Choose Your Plan Rationally:

Mr. Prashant took a Unit Linked Insurance Plan (ULIP) insurance policy from an agent parking Rs 30,000 as the premium amount. The policy maturity was of 15 years. The actual sum invested for the plan turned out to be Rs 16,000 only after the deduction of 40% agent commission, other management and administration charges.

It is always important that you choose a plan taking into account the costs involved. Unlike some other things, cost involved in an insurance plan can suck a considerable sum invested, especially in the first year.  This becomes all the more critical if you have got a ULIP. The number of units you get for the ULIP is dependant on the amount you invest.

Is it always necessary to follow the insurance agent route, or commission can be avoided?

No, it is totally avoidable. The problem with Indian investors is lack of knowledge of the products, options and the lack of comfort in taking a policy till compelled by the insurance agent. A person can purchase the insurance policy from online platform of the company also. This helps in deduction of the commission from the premium amount. However, in cases where the requirement is specific, it is advised that the help of policy agent should be taken with due care. There have been cases where the insurance plans purchased online have not fulfilled the desired purpose; therefore, options should be chosen selectively. Bargaining for lowering the commission is always possible while you plan to buy insurance from the agent.

  • Dayananda

    The investor needs to focus on “why he is buying insurance rather than commission structure of agent”.

    Request the author to throw more light on concept of insurance to public and educate them.

  • samir

    Dear Mr Amit , by taking any products through the market ,customer don’t have any rights about the margin of the seller, customer has to more focus about the Quality and service of the same. and Requested to don’t share this type Commission Structure like this. Please share more about your expertise in Equity or other Stocks.

    • Raj Kumar

      Are you an agent who is warning Mr. Samir? Mr. Samir is doing very right.
      Thanks Mr. Samir for such a nice article.
      Waiting for your next article.

      • samir

        Dear Mr Raj Kumar, I am an agent but not warn any one , i am just suggest for not to do so, because no one has right to do so. Thats wrong. Secondly Mr Rajkumar IRDA or any company is not foolish to have that commission structure, because to sale life insurance is not a Joke. Agent / Advisor deserve that thing with proper services to customers.

        • Raj Kumar

          Dear Samir,
          Its Ok that IRDA has some guidelines for distributing commission to agents. But why these guidelines should not be made public? Mr. Amit is just doing his job by letting customers aware that what more options they have in getting insurance other than going to agents only. And you just started him getting understand that customers should only focus on quality of job and not the agents commissions. Can you tell, do IRDA or LIC do offer their services qualitatively? I think, no and never. They just provide what they provide. Either you get it online, or offline (through an agent), you will be provided the same coverage and same benefits, but may be you will pay less while opting a plan online. Mr. Samir, You are talking in ways that do’not support that people should be aware about their rights. Mr. Sethi is just spreading fine words about how one can reduce his cost of insurance, and getting online is one of them.

  • Sudhir Kumar Khullar

    @ Mr. Amit Sethi, Thanks for sharing your learning, with each one of us. How does it matters, which mediator gets how much ?

    Agent, or Banker, or Broker, each one are paid there remuneration for the services they render to Customers. Most of the Agents, specially LIC Agents, shares there remunerations with Clints or Customers, where as no Banker or Broker, does. Moreover, Agents provide services to all there Customers, a personalised services, where as no other, mediator does.

    Bankers and Brokers will never be able to replace Adviser or Agents.

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