Know How Your Life Insurance Is Paid For

If someone is recommending a policy to you, you may wonder how they make money selling insurance. Most agents earn commissions that the insurance company pays, not a separate bill to you. Here is how that works and what to ask before you decide.

The short answer: insurers pay agents commissions

A licensed life insurance agent is usually paid a commission by the insurance company that issues the policy. The buyer doesn’t add that commission to the bill as a separate charge.

A commission is a payment tied to a policy sale. It follows the insurer’s compensation terms. Florida law also limits how an agent can share that pay. See Fla. Stat. § 626.572.

The premium pays for the coverage itself. The commission is one part of how the insurer prices and sells the policy. For the wider picture, start with the buy-sell agreement life insurance guide.

How first-year and renewal commissions work

Many policies pay an agent more in the first year and less in later years. The first-year commission is paid when the policy is sold. Renewal commissions are smaller payments that can continue while the policy stays in force.

That pattern matters to you. An agent’s income from a policy can last as long as the policy does. So ask how the pay works over the whole life of the policy, not only at signing.

This firm does not offer rebates or other inducements to buy insurance. One buyer shouldn’t get terms another buyer can’t get under the same schedule.

Why the product changes how an agent is paid

Pay can differ by product, so ask how each option is paid. The six lines are whole life insurance, term life insurance, key person insurance, buy-sell agreement insurance, estate planning life insurance and NRI life insurance.

Term life covers a set period. Whole or permanent life covers you for your lifetime and includes a cash-value feature, according to FINRA’s insurance guidance. A policy with cash value often has more moving parts, including surrender charges. That’s a reason to ask more questions.

Key person, buy-sell, estate planning and NRI coverage are built around a business or family goal. The right structure depends on the facts. Ask the agent to explain how the pay works for the design you’re considering.

If an agent recommends surrendering a cash-value policy, and doesn’t recommend using the money for another policy, Florida law requires written information first. Fla. Stat. § 627.4553 says that information includes, but is not limited to, the estimated surrender charge, the loss of any minimum interest rate guarantees, possible tax consequences, any forfeited death benefit, and any other investment performance guarantees being forfeited.

What to know about CPA fees and insurance commissions

Insurance is offered by the licensed agent, separately from the accounting practice. Accounting and tax work is a different relationship, with its own terms.

Florida law draws a clear line for CPA firms. A CPA firm may not accept or pay a commission for the sale or referral of public accounting services. Under Fla. Stat. § 473.3205, a certified public accountant or firm engaged in the practice of public accounting that accepts a commission for the sale of a product or service to a client must disclose that fact to the client in writing, in accordance with rules adopted by the board. The statute also prohibits accepting or paying a commission or referral fee in connection with the sale or referral of public accounting services. See Fla. Stat. § 473.3205.

When soliciting or selling insurance products, Fla. Stat. § 626.9531 requires agents to clearly indicate that they are acting as insurance agents and to identify the insurer. Nischay Rawal acts as a licensed insurance agent when a specific policy is discussed.

What to ask before you decide, and how to start a coverage review

Ask five things. How is the agent paid on this policy? Is that paid by the insurer and disclosed to you in writing? Which insurer issues it? What surrender charges or forfeited benefits apply? How does it compare with the alternatives?

Tax questions matter too. The IRS states that life insurance death benefits are generally excluded from gross income, while interest received on those proceeds is taxable. See the IRS guidance on life insurance proceeds.

If you’re planning for a co-owner’s death or retirement, or helping an aging parent with an estate plan, you may be facing a decision you didn’t expect. You don’t need every answer before you talk it through. Contact NR CPAs & Business Advisors to set up a coverage review of your situation.

Frequently asked questions