Insurance, especially for first-time purchasers, can be bewilderingly complicated. 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 hire 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 and the role they play.
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.
Since insurance agents are trained and educated about the various policies and insurers they represent, they are better able to determine which products will provide adequate coverage based on their clients' 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 in the event of a claim, when tension is high and time is of the essence.
What Kind of Insurance Do Agents Sell?
Some insurance agents specialize in a type of insurance, from life, health, and auto insurance to homeowners’ and business policies (for more about coverage you might need, see 5 Different Types of Insurance and Who They're Best For). Many, called generalists, choose to dabble in multiple types so that they can reap the benefits of selling several policies to a single client. On the other hand, some companies, called brokerages, make an entire business out of selling insurance and employ numerous specialized agents 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 require the services of an insurance brokerage. However, businesses both big and small often turn to insurance brokers because of the diverse range of exposures they need to cover (see 6 Types of Insurance All Business Should Have to learn more about some of the basic risks businesses face). It's much simpler to have a single agent line up a business’ auto, property, workers’ compensation and general liability policies (see 4 Essential Types of Liability Insurance for Businesses) than to have someone in the company run around to different insurers comparing quotes for every line of coverage.
How Do Captive and Independent Agents Differ?
When deciding to work with an agent, one very important factor to consider is whether they are a captive or independent agent. Despite the rather melodramatic name, a captive agent is simply an agent who works for a specific insurer and can only sell insurance products offered by that company. Conversely, an independent agent is free to sell insurance from any insurer with which they are registered. Insurance brokerages, for example, employ independent insurance agents and work with a number of different insurers.
The benefits of choosing an independent agent over a captive agent are clear: because independent agents don't rely solely on the products of a single insurer, they are less likely to push clients into less than ideal policies. Independent insurance agents have the freedom to draw from the offerings of many different insurers to find the policy most suitable for each individual client. In general, independent agents are able to offer clients a wider range of products and greater flexibility of coverage.
In addition, independent agents are sometimes able to leverage their relationships with insurers to the benefit of their clients. Because independent agents generate revenue for insurance companies just like captive agents do, insurers are inclined to encourage repeat business by offering top-quality products and working to ensure client satisfaction.
For example, assume Independent Agent X feels that a policy offered by Insurer A is the best fit for their client at the lowest price, but the policy lacks an important endorsement that comes standard on a more expensive policy offered by Insurer B. Agent X may be able to leverage her positive working relationship with Insurer A to get them to add a comparable endorsement to beat out the competition. The client gets a cost-effective policy tailor-made to meet their needs, the agent has a happy client, and Insurer A gains new business it could have lost to Insurer B if not for the agent’s negotiating prowess.
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, or 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.
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 (see An Intro to Insurance Sublimits to learn more about covering these items), working with an insurance agent takes some of the stress and confusion out of the process.
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.