Life Insurance Blog

Brokers can provide a useful service because they have a good working knowledge of the life insurance market and should be able to access a wide range of insurance products and providers. But they’re paid in various ways, and the customer should know the differences. For example, a commission-based insurance broker is one who is paid on commission. These are cheaper to hire up front, but can be more expensive in the long term.

A commission-based broker receives the commission from the insurance provider for referring the client’s business. The commission will sometimes be disclosed in the documentation, but it will not necessarily be clear.

Because this cost is hidden rather than open and visible like the fee for a fee-based broker, it can seem like a free service to the customers. However, the fee is built into the price of the insurance product and therefore is charged to the customer, although it may require a few years to pay off.

There are criticisms of commission-based insurance brokers, for example, that they can be unduly swayed by the offerred commission. While most of them will not offer totally unsuitable products in order to get the best possible commission, this can still lead to an unconscious pressure on the customer to take the deal.

Commission-based brokers do have their uses, if the consumer is aware of how he or she is being charged the commission through the lifetime of the insurance product. For example, if there is a cash flow problem when buying the life insurance, then a commission-based broker can be a good way to get the necessary advice without paying an up-front fee. In effect the customer is getting the broker’s fee on credit, freeing up capital for the actual insurance product being purchased.

If cash flow isn’t a problem, many commission-based brokers will allow a customer to pay an up-front fee and then request that any commission to be repaid to the policy buyer. However, the amount received is likely to be less than the fee paid out.