what value do independent life insurance brokers have?

Independent Life Insurance Broker Myth

Being an independent life insurance broker sounds like a lot of fun.  You don't work for any specific company.  You have no quotas to worry about.  Instead, you work independently and make unbiased recommendations best suited for your clients.  You also don't have to attend boring sales meetings or attend company picnics.

With so many amazing perks, there's an obvious question begging to be asked.  Why doesn't everyone become an independent life insurance broker?  The answer is simple.  These supposed benefits don't really exist.

Understanding the Difference Between Career Agent and Independent Broker

Let's first lay the groundwork for what I mean when I say, independent broker.  Most states don't recognize a difference between career insurance sales agents and independent brokers.  But for those who do, and for the sake of making a point, I want to identify key differentiators.

A career sales agent is an individual who works for an insurance company.  This persons' role is specifically the sale of insurance products offered by the company.  This person has a duty to the company to act in accordance with their policies.  They also have a duty to protect the company's interests while conducting business.  They are an extension of the company.

Sales agents often have quotas they must meet.  If the agent fails to meet his/her quota the company might terminate him/her.  It's also common for the agent to receive fringe benefits from the insurance company.  These benefits might include things like health insurance and retirement benefits.

It is also likely that a career sales agent has limited access to the entire marketplace of insurance products.  The agent might have options to conduct business as a broker with a select menu of life insurers pre-approved his/her career company.  However, the company can exclude certain products or companies from the agent's list of options.

Independent life insurance brokers do not work for an insurance company.  Their relationship is merely one of introductions.  Brokers introduce interested insurance buyers to insurance companies and help facilitate the sales process.  The broker has no commitment to the insurance company to protect the company's interests.  In some states, the broker actually has a responsibility to protect the buyer's interest.

Brokers do not generally receive any form of fringe compensation from a life insurance company.  Brokers receive commissions, but they do not receive additional benefits like health insurance or retirement plans from an insurance company.

An insurance company cannot limit a broker's access to other insurance products or other insurance companies.

Even though the industry often uses the terms “agent” and “broker” interchangeably, I'm going to assign them specific roles.  I'm doing this for the sake of understanding this blog post.  So for today, I'm using the term “agent” to refer to a career sales agent and the term “broker” for independent brokers.

Life Insurance Broker more Objective?

It seems natural to argue that brokers are more objective than agents.  The broker is not wed to a specific company and has no quota to satisfy.  The broker also has no restriction from a career mothership on the types of insurance products he/she can sell.

So the broker should be able to recommend any product to any client and do so with little worry beyond will this product best meet my client's needs.

But it turns out life is complicated and this doesn't work as neatly as it first appears.  Brokers may not have line-in-the-sand style requirements, but they do have manipulative considerations to address.

Terminated for Lack of Production

Brokers are free to contract with any life insurance company that accepts business from brokers.  Some life insurers only sell their products through their career agents and will not accept business from brokers.  Setting those few “career agent only” companies aside, this creates a vast world of possibilities for brokers.

Independent life insurance brokers are free to go out and establish any many relationships with as many insurance companies as they wish.  The problem, however, will be keeping all of those insurance companies happy.

Insurance companies want to sell insurance policies.  That's no big surprise.  Life insurance companies also want to establish and maintain relationships with brokers who send them a lot of business.  Not a shocking revelation.

But what happens to the broker who hooks up with a random life insurance company to write a policy for a client who has a specific need filled by a specific life insurer?  If the broker doesn't quickly find more clients with a similar need to fill, he/she will find himself a tad on the outside of the client relationship.

Insurance company place “silent quotas” on life insurance brokers.  They rarely spell these quotas out to brokers when they establish a relationship with them.  I've always speculated its because they don't have an actual number.  It's more a concept the company uses at its convenience.  The silent quota is an amount of business the insurance company wants from the broker in order to keep them active as an appointed producer with the company.

Appointed Producer

An insurance agent/broker is an appointed producer if they have active status with the company to submit life insurance applications to the company.  The appointment does cost money.  The agent/broker or insurance company must pay an annual fee to keep the appointed producer active.  Every state in which the producer plans to conduce business collects a fee.

Insurance companies that do not receive what they arbitrarily deem requisite business to justify appointed producer status active will terminate it.  This often happens under the justification of cost savings.  The insurer is saving the appointment fee payable to each state.  How much are they saving?  About $25 per state active appointment.

This hopefully makes it clear that life insurance brokers have a real incentive to sell a certain amount of life insurance with an insurance company in order to keep their appointed producer status active.  If they don't, termination doesn't mean they can never sell that company's products again.  It does mean that they can't access data on the policies their clients own.

The Service Gap

If a life insurance broker loses access to his/her client data at a specific company it makes servicing that policy much more difficult.  The broker might be able to call in some requests on behalf of the client.  But the process becomes much more cumbersome and often leaves the client suffering from the breakdown.

Life insurers are not adequately equipped to handle the service volume they often offload on agents and brokers.  This makes eliminating a brokers ability to lend a hand on service a strange practice.  But this sadly happens a lot more often than I'd like to admit across many life insurance companies.

A very easy Solution

I'm not here to pass judgment on life insurance companies that wish to save the state appointment fee by terminating brokers.  While the amount isn't enough to satisfy me in terms of a priority cost-savings measure, I'm not in charge and the decision isn't mine to make.

I do think, however, that giving the broker the option to pay the fee is a best practice.  Some won't and that's fine.  But those who take service seriously will.  When allowed, I have personally paid these fees. I will continue doing so to keep access to client data and provide service to my policyholders.

I also have situations where I no longer hold an active appointment at a company because I stopped sending them business.  I received no option to maintain any sort of status with the company and have little to no access to client data.  This makes helping clients exceedingly difficult at times.  I still make the effort.

The industry has more than enough to worry about concerning competition and the various campaigns that exist solely to pull people away from insurance.  This problem as an easy solution and we all should work together to check this one off the list.

I'm optimistic that eventually, this problem will fade more and more into the background.  However, I'm also afraid a lot more turbulence lies ahead before we get there.

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.

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