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Understanding Life Insurance Commissions: What Advisors Don't Tell You

Published on March 24, 2025
Cover image of post "How Life Insurance Commissions Work (And What Advisors Don’t Tell You)"

Life insurance commissions are one of the financial industry's best-kept secrets. While advisors are quick to highlight the benefits of various insurance products, many are far less transparent about how they're compensated for selling these policies.

Why does this matter to you? Because understanding commission structures reveals the powerful financial incentives that can influence the insurance recommendations you receive.

Is it time for you to hire afinancial advisor? Explore Sam's List, a curateddirectory of financial advisors and wealth managersthat specialize in working with specific types of individuals and their needs!


The Commission Structure Behind Life Insurance Sales

Financial advisors who sell life insurance typically earn two types of commissions:

First-Year Commissions

The initial commission on a life insurance policy is by far the largest and most influential part of advisor compensation:

  • Term Life:40-90% of first-year premium
  • Whole Life:80-110% of first-year premium
  • Universal Life:90-105% of first-year premium
  • Variable Life:75-90% of first-year premium

These percentages mean that on a $10,000 annual premium whole life policy, an advisor might receive $8,000–$11,000 in the first year alone.

This amount can exceed what they might earn managing hundreds of thousands of dollars in investments for an entire year.

Renewal Commissions

After the first year, advisors continue to earn smaller commissions for as long as you keep the policy in force:

  • Term Life:2–5% of annual premium
  • Whole Life:3–10% of annual premium (higher in years 2–10)
  • Universal Life:2–5% of annual premium
  • Variable Life:2–5% of annual premium + possible asset-based fees

These ongoing commissions can last for decades, offering long-term income for the advisor.


Commission Hierarchies and Overrides

Commissions often extend beyond your advisor:

  • Your advisorreceives the base commission
  • Agency managergets 10–30% of what your advisor earns
  • Regional directormay also get a cut

This structure adds more pressure across the board to sell policies.


How Commissions Vary by Product Type

Term Life Insurance

  • Often the most appropriate choice for consumers
  • Pays the lowest commissions
  • Example: $1,000 premium = $400–$900 first-year commission; $20–$50 in renewals

Whole Life Insurance

  • Premiums are 8–12x higher than term for same coverage
  • Example: $10,000 premium = $8,000–$11,000 upfront + $300–$1,000/year in renewals

Universal Life Insurance

  • Often pays the highest upfront commissions
  • More complex, making it harder for clients to evaluate fairly

The "Minimum Production Requirement" Reality

How It Works:

  • Advisors must hit quotas: total premiums sold, # of policies, or % of clients with insurance

Consequences of Missing Targets:

  • Lose office support or benefits
  • Get lower commission payouts
  • Risk termination

"If you didn't hit your life insurance numbers for two quarters in a row, you'd be called in for a 'business planning' meeting," one former advisor said. "After a third, you might lose your contract."


Disclosure Requirements: What Advisors Must (and Don’t Have to) Tell You

Current Regulations:

  • No requirement to disclose exact commission figures
  • Clients must ask to get clarity

How to Get the Truth:

Ask these questions directly:

  • "What is your commission percentage for this policy?"
  • "What are the ongoing commissions?"
  • "What would you earn if I chose term instead?"
  • "Do you get bonuses or rewards for selling this?"

How Commission Structures Influence Recommendations

Bigger Premium = Bigger Commission

  • Advisors might recommend more coverage than needed
  • They may push higher premiums

Permanent vs Term

  • Permanent life = much higher commissions
  • Many advisors nudge clients toward these even if term is better

Policy Replacements

  • Replacing policies restarts commissions for the advisor
  • You may lose benefits, pay higher premiums, and reset contestability clauses

Alternative Advisor Compensation Models

Fee-Only Advisors

Fee-Based Advisors

  • Paid by clients and earn product commissions
  • Still prone to conflicts

Direct-to-Consumer Insurance

  • No advisor = no commission-driven advice
  • May miss out on custom strategy or expert input

How to Protect Yourself from Commission-Driven Advice

Ask About Compensation

  • "Are you a fiduciary when recommending insurance?"
  • "How are you compensated for this policy?"
  • "What other solutions did you consider?"
  • "Do you have any quotas to meet?"

Get Multiple Opinions

Compare:

  • A commission-based insurance agent
  • A fee-only advisor
  • A DIY/direct-to-consumer platform

Focus on Your Needs First

Before shopping policies:

  • Ask: do you actually need life insurance?
  • Decide between term vs permanent
  • Determine coverage amount and budget

Conclusion: Knowledge Creates Empowerment

Life insurance can be a powerful tool—but only when it aligns with your needs.

Understanding how commissions work helps you:

  • Evaluate advisor motives
  • Ask smarter questions
  • Make confident, independent decisions

If you're looking for unbiased advice,find a fee-only financial advisor through Sam’s List.


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Frequently Asked Questions About Life Insurance Commissions

How much commission does a financial advisor make on life insurance?

Depending on the product, advisors earn 40–110% of your first-year premium, with ongoing renewal commissions for the life of the policy.

Why do financial advisors prefer whole life insurance?

Whole life insurance pays much higher commissions than term and includes long-term renewal income, creating financial incentives to recommend it.

Are advisors required to disclose their commissions?

No. Advisors are not required to disclose commission amounts unless you ask directly.

What are insurance production requirements?

Many firms require advisors to hit quarterly/annual insurance sales goals. Failing to meet them can lead to lower payouts, fewer resources, or termination.

How can I avoid commission-biased advice?

Work with a fee-only advisor who doesn’t sell products. Or get multiple opinions from advisors with different compensation models.


Author: Kimi, Co-founder of Sam’s List
Kimi writes about what she's learning while building Sam’s List and shares honest takeaways from her conversations with accountants and financial advisors across the country. None of this is financial advice—just the stuff most people wish someone told them sooner.


Comments & Questions

Profile picture of Cassandra Jimson
Cassandra Jimson
Apr 12, 2025
Really clear and thoughtful explanation of life insurance commissions! I appreciate how you broke down the mechanics—it’s eye-opening to see the balance between incentives and client needs. Personally, I’ve been thinking about how agents manage the administrative side of their work while building trust with clients. Streamlining tasks like client follow-ups or data organization could free up time to focus on those relationships. For example, tapping into resources likehttps://virtualcoworkers.comfor support can help agents stay on top of their game without getting bogged down. What do you think—how much does time management impact an agent’s ability to navigate commission structures effectively?
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