Insurance Rebating Everything you Need to Know

Most states define insurance rebating as an offer or inducement an agent/broker uses to get a prospective customer to buy an insurance policy where the inducement falls outside of the features of the life insurance contract.  For example, if an agent offers to share some of his/her commissions earned on the policy sale with the customer, this is rebating and it is illegal in almost every state in the U.S. and highly (and I do mean highly) frowned upon in the few states that do not explicitly outlaw it.

Rebating is a serious violation of insurance law that not only comes with legal penalties imposed by state regulators but also various sanctions from insurance companies.  In most cases of rebating, the insurer will terminate its relationship with the agent/broker and other companies may choose to refuse to establish a relationship with an agent/broker who committed rebating in the past.

The Purpose of Rebating Laws

Rebating laws seek to level the playing field for insurance producers.  The spirit of the law is that it avoids unfair advantages some agents/brokers may have if they are in a position to offer a portion of their commissions to their prospective clients.  Smaller agents/brokers may not have the resources to make such an offer.  Additionally, this may lead to questionable recommendations on life insurance contracts based on the commission rates offered to the agent/broker by the insurance company.  If one company chooses to pay higher compensation than another, the agent/broker may choose to use that higher commission rate to offer a rebate to his/her potential client in order to win the sale.

But simply offering to share the money earned on selling someone a life insurance policy isn't the only action that meets the definition of rebating in many states.  Again, the spirit is to prevent agents/brokers from offering features that are not part of the insurance contract as a reason to buy a policy.  Simply offering to send a potential client on vacation if he/she buys a policy, is most likely a violation of rebating laws in all states that explicitly prohibit it.

Insurance Companies versus Insurance Producers

Rebating laws generally speak to rebating in a way that silos insurance companies from insurance producers (i.e. agents and brokers).  While there are several reasons to make a distinction between the two, the vast majority of states prohibit rebating equally for both entities.  Further, we can generally assume that what is illegal for an insurance company to do is also illegal for a producer to do and vice-versa.

There is one exception to this statement in the state of California, and we'll dive into the details in the Insurance Rebating Laws by State section of this blog post.

The Intentions of the Inducement are Subjective

Rebating seems like a simple concept.  Insurance agents cannot share their commissions with their customers.  But the idea behind rebating is more complex than that.  It's really intended to prevent insurance agents from offering current and prospective customers an inducement to buy a life insurance policy with that inducement being directly funded by the commissions earned on the sale.  Defining what inducements count as rebating and what ones do not can be extremely complicated.

Is paying for lunch when you meet with a potential buyer an example of rebating?  What if the check comes and the agent asks then, “do you want to buy this policy or not?” before offering to pay the bill?

For most states, the important differentiator is if the agent/brokers places a contingency on the gift/kind offer.  So for example, if the check comes for lunch and the agent says, “I'm paying if you're buying this policy,” he/she has likely broken the rebating law.  Of course, such a statement may be more tongue in cheek than a real attempt to twist someone's arm into buying a life insurance policy.

Additionally, the intent of a gift may have a different interpretation based on the type of insurance being marketed.  A gift offered by an agent/broker to a single potential client may not violate rebating laws where a similar gift offered by an agent/broker to a group of employees for health insurance may violate the law.  This is the case because life insurance and health insurance differ enough to potentially have different buying motivations.

Insurance Rebating Laws By State

Understand that what specifically constitutes rebating will vary in definition from state to state.  This list seeks to identify what states explicitly outlaw rebating and what their legal view on “gifts” is with respect to possible rebating violations:

State	Rebating Legal?	Gifts
Alabama	Illegal	Gift must not be tied to the purchase of an insurance policy and cannot exceed $15
Alaska	Illegal	Most gifts are no allowed especially gifts used to induce someone to meet with an agent to hear about insurance or provide information that could lead to a quote.
Arizona	Illegal	No guidance given
Arkansas	Illegal	Gifts under $25 not directly tied to the purchase of an insurance contract
Colorado	Illegal	No guidance given
Connecticut	Illegal	Gifts of any kind violate rebating laws
Delaware	Illegal	No guidance given
District of Columbia	Illegal	No guidance given
Florida	Legal, but only when the rebate is equally available to all potential insured's and proper disclosure of the rebate exists for all potential customers.  Further note that an insurer must permit rebating for all of its producers or none of them.	No guidance given
Georgia	Illegal	No guidance given
Hawaii	Illegal	No guidance given
Idaho	Illegal	Activity defined as customer service (the state of Idaho has a list) are exempt from rebating laws.
Illinois	Illegal	Certain services offered for free are permitted and small gifts (IL does not define the exact value but uses certain examples such as pens, calendars, atlases, etc.) are permissible
Indiana	Illegal	Gifts under $25 not directly tied to the purchase of an insurance contract
Iowa	Illegal	Social meetings such as dinners or sporting events are permitted as well as small gifts such as pens, calendars, atlases, etc.
Kansas	Illegal	No guidance given
Kentucky	Illegal	Gifts under $25 not directly tied to the purchase of an insurance contract
Louisiana	Illegal	Small gifts (no specific value provided) are permissible provided they are not directly tied to the purchase of an insurance policy.
Maine	Legal…sort of see gifts column	Maine allows for gifts in connection with the marketing of insurance contracts but has several rules concerning the gift.  The gift must be less than $100 (or $500 if offering a raffle or drawing) and the gift cannot be in cash (but it can be in a cash equivalent such as a gift card).  Maine also permits free services provided the service is valued at or below $100.
Maryland	Illegal	No guidance given
Massachusetts	Illegal	No guidance given
Michigan	Illegal	Gift of $5 to $10 in value permitted so long as it is not directly tied to the purchase of an insurance policy.
Minnesota	Illegal	No guidance given
Mississippi	Illegal	No guidance given
Missouri	Illegal	No guidance given
Montana	Illegal	Gifts under $50 permissible, but must be available to everyone and not tied to the purchase of an insurance policy.
Nebraska	Illegal	No guidance given
Nevada	Illegal	Gift of $20 or less permissible provided they are not directly tied to the purchase of an insurance contract
New Hampshire	Illegal	Gift of $25 or less permitted provided they are not directly tied to the purchase of an insurance contract.
New Jersey	Illegal	Charitable contributions are permitted provided the insurance purchaser does not benefit from any tax deduction created by the charitable donation.
New Mexico	Illegal	No gifts allowed
New York	Illegal	Free services are allowed provided they are related to the insurance contract from a customer service nature and they are offered in a non-discrimenatory way.  Gifts under $25 are permitted provided they are not directly tied to the purchase of an insurance contract.
North Carolina	Illegal	Small gifts (no specific value provided) are permissible provided they are not directly tied to the purchase of an insurance policy.
North Dakota	Illegal	Gifts of $100 or less are permissible provided they are not directly tied to the purchase of an insurance contract.
Ohio	Illegal	Gifts under $50 permissible, provided they are not directly tied to the purchase of an insurance contract.
Oklahoma	Illegal	Gifts of $100 or less are permissible provided they are not directly tied to the purchase of an insurance contract.
Oregon	Illegal	Gifts of $100 or less are permissible provided they are not directly tied to the purchase of an insurance contract.
Pennsylvania	Illegal	Gifts of $100 or less are permissible provided they are not directly tied to the purchase of an insurance contract.
Rhode Island	Illegal	Small gifts (no specific value provided) are permissible provided they are not directly tied to the purchase of an insurance policy.
South Carolina	Illegal	No guidance given
South Dakota	Illegal	Gifts of $10 to $25 provided it is not directly tied to the purchase of an insurance contract.
Tennessee	Illegal	Small Gifts permitted by not if gifts are only given to those who buy a policy.
Texas	Illegal	No guidance given
Utah	Illegal	No guidance given
Vermont	Illegal	No guidance given
Virginia	Illegal	No guidance given
Washington	Illegal	Gifts of $100 or less are permissible provided they are not directly tied to the purchase of an insurance contract.
West Virginia	Illegal	Gifts under $25 not directly tied to the purchase of an insurance contract
Wisconsin	Illegal	No guidance given
Wyoming	Illegal	No guidance given

Notice that there is one state missing from the list, California.  California has the most remarkable history concerning insurance rebating and its current laws governing the practice warranted discussion beyond a simple table.  California law originally prohibited insurance rebating of any kind, but the state repealed this law in the '80s.

The California Department of Insurance since clarified the State's official (sort of) position on rebating by referencing other California Laws governing commerce.  These laws explicitly outlaw rebating done by insurance companies.  This clarification specifically omitted the prohibition of rebating among insurance agents/brokers.  So technically insurance producers can rebate, but there are further rules about this.  Key among the rules is that California's Business and Professional Codes concerning anticompetitiveness still apply.  So rebating in a way interpreted to violate these laws will most likely result in litigation against the agent/broker.  Because California does not prohibit rebating among insurance agents/brokers its laws not surprisingly provide no guidance on gifts.  However, other laws may come into effect, especially if the insurance producer also holds a license to sell investment products.

Further, several life insurers have specific rules that explicitly prohibit an insurance agent/broker from engaging in insurance rebating regardless of State law.  So being contracted with any of these insurers, and rebating in California, may not cause legal ramification from California itself, but it could result in sanctions imposed by the insurance company.  Insurers will normally sever their relationship with a producer who engages in rebating.

Rebating Life Insurance

Designing a life insurance policy to maximize cash value accumulation or selecting a High Early Cash Value policy often comes with reduced commissions to the insurance agent/broker.  This does not violate rebating laws because the enhanced cash value is a feature of the life insurance contract.

Any other attempt to enhance a policy owner's net benefit from a life insurance policy by offering some perk not internal to the life insurance contract will normally violate rebating laws.

An explicit exception to this is premium deposit accounts.  These accounts pay policy owners interest or discount future premiums due on a life insurance policy.  Many states specifically exempt these accounts from anti-rebating laws.

Rebating Laws Apply to Renewal Payments as well

While most rebating conversations take place in the context of new business (i.e. when a customer buys a new policy), rebating laws apply to inducements used to persuade a current policyholder to continue paying his/her premiums.

For example, if an agent has a client who expressed a desire to cancel his/her current policy, and this agent offers to pay the client money or offer some other non-customer-service related service/favor/etc. to keep the policy in force, the agent likely violated rebating laws–in states were rebating is illegal.

To reiterate, the critically important rule governing rebating insurance is the offer to provide the policy owner (prospective or current) with some benefit not internal to the insurance policy.