What is an insurance broker?
An insurance broker acts as an intermediary between you and an insurer. Armed with both your background and their insurance know-how, they can find a policy that best suits your needs for a reasonable price.
While brokers can save you time and money, you may have to pay a broker fee for their services.
Even with the fee, you may spend less overall. For example, if a broker saves you $100 on a policy per year for three years, and charges a $100 fee, you’ve still saved $200.
When to use an insurance broker
Using a broker isn’t necessary for everyone. How you buy insurance is a personal choice, but brokers are usually best suited for people who have more complicated insurance needs, like a landlord or small business owner who needs several policies.
You might benefit from an insurance broker if you:
Have multiple cars or homes.
Want to thoroughly understand the ins and outs of your policy, such as exclusions and limits.
Need insurance for a business.
Want to shop around with multiple insurers without investing your time or energy.
Want a personal relationship with someone invested in knowing your background and coverage needs.
Keep in mind, if you’re buying permanent life insurance, it’s best to consult a fee-only financial advisor (more on this later).
How brokers are paid
Understanding how brokers are paid will help protect you from a broker who cares more about making money than placing you with the right policy.
Brokers can make money in two different ways: through a commission or broker fee. They may charge both or only a commission. Most states require brokers to disclose commission rates and other fees upfront. Still, it’s smart to ask about any charges you’ll have to pay besides premiums.
Brokers receive a commission from an insurer when they place you with that company. The commission amount varies based on the policy and company and is typically calculated as a percentage of the premium.
Brokers often receive a larger commission on the first policy versus renewals. Life insurance brokers, in particular, can earn up to a 100% commission the first year. Because this could be a strong motivator to sell you more life insurance than you need, NerdWallet recommends consulting a fee-only financial advisor when you buy a permanent life policy, which is considerably more expensive and complex than term life insurance.
Besides maintaining their reputation, brokers have a financial reason to ensure you like and keep your policy. If you cancel your insurance or stop making payments during the first few years, the broker may need to repay the commission to the insurer.
The commission is automatically included in the price of the policy. If you shop for coverage on your own, you would still pay the same price — the insurer would just not have to pay a commission.
Because insurance brokers receive a commission from each company they work with, they theoretically shouldn’t advocate for one insurer over another. Still, some companies offer insurance brokers bonuses or gifts for bringing in clients, with larger incentives for those who bring in more business. Again, always ask upfront about how the commission works.
In addition to receiving commissions, some insurance brokers also charge fees. In general, broker fees must be reasonable and disclosed to the buyer. Your state might also have fee restrictions. For instance, in Florida broker fees are capped at $35.
Broker fees are often nonrefundable, so if you cancel your policy, you won’t get your money back unless your insurance broker was dishonest.
Insurance broker vs. independent agent
Insurance brokers are often confused with independent agents. It’s easy to see why: Both work with multiple companies and earn a commission. However, independent agents make their money entirely from commissions.
Since both brokers and agents make a higher profit when you buy more coverage, they have an incentive to upsell. At the same time, they need to provide quality customer service to keep your business.
Independent agents represent insurance companies, not the people buying the policies, whereas brokers represent the buyer. Agents are also able to bind a policy, or provide temporary coverage before a policy is finalized and issued. An insurance broker will generally work with an agent or insurer to bind a policy. Before that happens, the price can still change.
While independent agents work with more than one insurer, they have contracts with specific companies and are often limited to selling certain policies, unlike brokers. On one hand, this limits your insurance options to those companies. However, independent agents may know more about the companies and policies they sell than brokers.
Other ways to buy insurance
To avoid a broker fee, you can buy insurance:
Directly through the insurance company, online or over the phone. Some insurers don’t use agents, in which case you’ll work with the insurer directly.
Through a captive agent, who works for one insurer.
With an independent agent.
Even if you’re working with an independent agent or insurance broker, you can still shop around yourself. Using an insurance comparison tool can help you find the cheapest price by looking at rates from multiple companies.