Insurance can be bewilderingly complicated, especially if you're a first time buyer. But many young adults who are in the market for insurance (and even policyholders who have been insured for a while) aren't sure whether they should work with an insurance agent to help them navigate this complicated responsibility.
This article will help prepare you to make an informed decision by giving you the basic information about insurance agents, the role they play, and what they can do to help you.
What Is an Insurance Agent?
An insurance agent's job is simply to help individuals and businesses find the insurance policies that best meet their needs. It's important to note that although agents sell insurance policies, they do not actually provide insurance or pay claims. It is the insurer, not the agent, that actually protects the insured against the risk of loss. Essentially, an insurance agent is a middle-man that facilitates transactions between the client and the insurer.
Insurance agents are trained and educated about the various policies and insurers they represent. That puts them in a good position to help their clients figure out which products will provide adequate coverage for their needs.
An agent's familiarity with the insurance industry and technical jargon also means they can make sure that the insurer receives all the necessary information and documentation. This can be especially useful when it comes time for you to file a claim, when tension is high and time is of the essence (though there are some steps you can take on your own - learn about them in How to File an Insurance Claim that Gets Paid Sooner).
What Kind of Insurance Do Agents Sell?
Some insurance agents specialize in a single type of insurance – life, health, auto, homeowner's, business policies, and so on (to find out what kind of coverage you might need, see 5 Different Types of Insurance and Who They're Best For).
Many agents, however, are generalists. That means they choose to dabble in multiple types so that they can reap the benefits of selling several policies to individual clients.
Some companies combine the two. Brokerages make an entire business out of selling insurance and they employ numerous specialized agents that can work together to meet all of a client’s insurance needs (possibly including some Strange Insurance You Probably Don't Need).
The average person doesn't usually need the services of an insurance brokerage and can settle instead for a generalist or a handful of specialist agents. If you run a business – even a small one – you should consider working with a brokerage because of the diverse range of exposures any business needs to cover (learn more in 6 Types of Insurance All Business Should Have). It's much simpler to have a firm lining up all of your company's auto, property, workers’ compensation, and general liability policies than to have a single agent running around to different insurers comparing quotes for every line of coverage.
What's the Difference Between Captive and Independent Agents?
The name might sound melodramatic, but a captive agent is simply one who works for a specific insurer and only sells that company's insurance products.
Conversely, an independent agent is free to sell insurance from any insurer they are registered with. Insurance brokerages, for instance, hire independent agents and work with a number of different insurers.
A captive agent will know their company's insurance products in and out. If you want someone who is intimately familiar with the policies you're going to be purchasing and the processes you'll be dealing with, a captive agent can deliver that.
There are, however, some clear benefits to working with an independent agent. For one thing, because they work for multiple insurers and can offer multiple competing products, they're less likely to encourage an insurance applicant to purchase a policy that isn't ideal for them. The flexibility that comes with having access to a wider range of products means that your coverage might be better tailored to your particular situation.
Insurers also know that they're competing for a sale through independent agents. If the terms on their policies don't suit their client, they can lose the sale to a rival insurance company. And that's good news for you. An independent agent can leverage this competition to negotiate better terms on your policies.
How does that work in practice? Let's say you're in the market for life insurance and you're comparing two rival policies. Your agent feels that a policy from Insurer A is the best fit for you at the lowest price, but there's one problem: the policy lacks an endorsement that matters to you. Insurer B does offer that endorsement, but at a higher rate than you'd like to pay. Your agent might be able to convince Insurer A to add the endorsement to your policy in order to beat out the competition. In the end, everyone wins: the insurer makes a sale, the agent collects a commission, and you get an affordable policy that meets your needs.
How Are Insurance Agents Paid?
Hiring an insurance agent is a lot like hiring a financial advisor: the cost may be worth it in the long run because professional guidance provides greater security. However, it is important to know how your insurance agent is being compensated to ensure that their recommendations can be trusted.
Insurance agents are generally compensated in one of three ways:
- Commission only
- Salary only
- Salary plus bonuses or partial commission.
If your insurance agent is compensated by salary only, you have no cause for concern because she will be paid the same amount whether she sells you a policy or not. You will likely be charged a flat fee to enlist the agent’s services, regardless of which products you purchase.
When commissions and bonuses come into play, however, you may need to do a little homework. When agents are paid with commissions, that cost is often passed onto you in addition to your policy premium. Though bonuses are not directly funded by insured premiums, agents must meet sales quotas to earn bonuses.
The degree to which an insurance agent must rely on bonuses or commissions correlates strongly with the degree of caution you should employ when considering their recommendations. An agent compensated entirely by commission is highly motivated to sell you the most expensive policy available, even if a cheaper one is just as suitable. A commission-based agent may also be motivated to sell you additional policies or expensive endorsements to existing products. Though this rule applies equally to captive and independent agents, the wider variety of products available to independent agents means they are more likely to be able to offer policies that fill their wallets while still meeting your needs.
Of course, not all agents are money-grubbing opportunists. However, an unscrupulous agent can be just as educated and professional as any other and can easily lead those who do not fully understand their own insurance needs into purchasing unnecessary or overpriced coverage. Understanding both the type of coverage you need and how your insurance agent is compensated can help you avoid getting fleeced (find out how to tell if someone is a legitimate and authorized agent).
Do You Really Need an Agent?
Whether or not you really need an insurance agent depends entirely on the complexity and depth of coverage you require. If all you need is a simple auto policy to cover your family vehicle for liability and physical damage (find out more in Auto Liability Insurance - How Much Is Enough?), you can likely find a policy that provides adequate coverage by looking online or contacting a trusted insurer.
However, if you have a large property; several vehicles; multiple homes; or valuable collections of art, jewelry, or rare items, working with an insurance agent takes some of the stress and confusion out of the process (see An Intro to Insurance Sublimits to learn more about getting coverage for valuables).
Likewise, if you own a business, especially a restaurant, bar, adventure sport company, or another type of business difficult or expensive to insure, an insurance agent can be especially useful.