Insurance Brokers: What They Do and Who Needs One

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Insurance brokers help you find a policy that best fits your needs but aren’t necessary for everyone.

It’s smart to compare quotes from several insurance companies to find the best deal when buying insurance. Although anyone can easily compare rates online and find the best price, it is sometimes a good idea to have someone guide you through the options.

What does it mean to be an insurance broker?

An insurance broker acts as an intermediary for you and your insurer. They can help you find the right policy for your needs at a fair price by combining your insurance knowledge with your background.

Brokers can help you save time and money but you might have to pay a fee.

You may actually spend less even with the fee. If a broker charges $100 per year and saves $100, that’s $200 savings.

When should you use an insurance broker?

A broker is not necessary for all. It is up to you how you purchase insurance. However, brokers are best suited for those with more complex insurance needs such as landlords or small-business owners who need multiple policies.

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An insurance broker might be a good option if you are:

  • Multiple cars and homes.
  • You want to fully understand your policy’s intricacies, including exclusions or limits.
  • You will need insurance to protect your business.
  • You can shop around with several insurers without spending your time and energy.
  • You want to build a relationship with someone who is interested in your history and needs for coverage.

Remember that if you are looking to purchase permanent life insurance, it is best to speak with a fee-only advisor (more details later).

How brokers get paid

Knowing how brokers are paid can help you protect yourself from brokers who only care about making money rather than placing you on the right policy.

There are two ways brokers can make money: through commissions or broker fees. They can charge a commission or just a commission. Many states require brokers to disclose upfront commission rates and any other fees. It’s still smart to inquire about any additional fees, besides premiums.

Commissions

When they place you with an insurer, brokers receive a commission. The commission amount is dependent on the policy and the company. It is usually a percentage of your premium.

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Brokers are often paid a higher commission for the first policy than they receive on renewals. A life insurance broker can make up to 100% of the commission in the first year. This could make it more attractive to sell more life insurance than you actually need. NerdWallet recommends that you consult a fee-only advisor when you purchase a permanent policy. Permanent life policies are more costly and more complex than term insurance.

Brokers have an obligation to maintain their reputation and ensure that you are happy with your policy. The broker might need to reimburse the insurer if you cancel your insurance policy or cease making payments within the first few years.

The policy price includes the commission automatically. You can still shop for coverage by yourself, but the insurance company would not be required to pay a commission.

Insurance brokers are paid a commission by each company they represent. This means that they shouldn’t recommend one insurance company over another. Some companies offer bonuses and gifts to insurance brokers for bringing clients in, as well as larger incentives for those who bring more business. Always ask about the commission structure upfront.

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Broker fees

Some insurance brokers charge fees in addition to commissions. Broker fees should be disclosed to buyers and must be reasonable. You might have fees restrictions in your state. In Florida, for example, broker fees are limited to $35

Broker fees are usually non-refundable. If you cancel your policy, your money will not be refunded unless the broker was dishonest.

Independent agent vs. insurance broker

Independent agents and insurance brokers are often misunderstood. It is easy to understand why. Both earn commissions and work for multiple companies. Independent agents, however, make their money solely from commissions.

Both agents and brokers make more money when you purchase more coverage. This gives them incentive to sell more. Agents and brokers must provide excellent customer service in order to maintain their business.

Brokers represent the buyer, while independent agents represent insurance companies. Agents can also bind policies or provide temporary coverage until the policy is issued. A broker can usually work with an insurer or agent to bind a policy. The price of a policy can change before that happens.

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Independent agents may work with multiple insurers, but they are contracted with specific companies. They can only sell certain policies and not brokers. This limits your insurance options to these companies. Independent agents might have more information about the policies and companies they sell than brokers.

There are other ways to purchase insurance

You can purchase insurance to avoid paying a broker fee

  • You can contact the insurance company directly, online, or by phone. In some cases, insurers do not use agents. In these cases you will work directly with the insurer.
  • Through a captive agent who works for one insurance company.
  • An independent agent

You can shop around for the best price even if you work with an independent agent, broker or insurer. An insurance comparison tool will help you compare rates from different companies to find the best price.