When you work with a life insurance agent, you typically don’t pay the agent directly. In fact, insurance companies usually pay agents based on the nature and size of the policy you buy. And that’s why you might want to hire a fee-only life insurance consultant.

These consultants work for a fee that customers pay, rather than insurance company commissions, which are baked into policy premiums. They can advise you on such matters as finding the right coverage, reviewing a policy you are considering and deciding whether to keep an existing policy.

Regardless of your life insurance needs, it pays to shop around for the best policy at the best price.

To better understand why a fee-only adviser might be a good idea, it’s helpful to start with a short explanation of commissions.

How life insurance commissions work

Life insurance agents generally receive a percentage of the commissions you pay for the first year of coverage, and may also get a smaller share of commissions through the next nine years of a permanent policy (which is designed to remain in force as long as you continue paying premiums and builds cash value over time).

The first-year commission can equal or even exceed premiums paid in the first year. Over time, up to one-quarter of what you pay can go toward commissions, says Glenn Daily, a fee-only life insurance consultant based in New York. 

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Commissions have the potential to impact agents’ advice because certain insurance companies and policy types come with higher commissions than others. For instance, agents might push permanent insurance, over cheaper term coverage, which lasts for a specific number of years and builds no value, according to the National Association of Insurance Commissioners. “The agent often makes less money for selling term than for other forms of life insurance.”

Agents also may not be motivated to suggest methods of lowering commissions, such as blending term and permanent coverage, rather than just buying a permanent policy. Permanent policies are generally more expensive and complicated than term coverage, which lasts for a specific number of years and builds no value.

“It’s naive to think that agents are not affected by this,” Daily says. “It’s asking too much to put agents in a position where they can get paid a lot more if they say one thing than if they say something else.”

Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, an industry group, says that, while there are undoubtedly individual cases of commissions skewing agents’ advice, he knows of no in-depth study of or major lawsuit over the issue.

“I don’t think there’s any basis for arguing this is a widespread, inherent problem,” he says.

Fee-only life insurance consultants don't sell policies

The fact that the commission model has lasted this long without any major outcry is evidence that agents generally do a good job of recommending products that are in the interest of their customers, Weisbart argues.

A fee-only life insurance consultant won’t sell you a policy. Rather, the consultant will help you find the policy that best suits your needs.

“What tells me that I’m accomplishing something is that almost all of my clients end up doing something different after talking to me then what they were thinking of doing when they came to me,” Daily says.

For people who are shopping for and buying life insurance, a fee-only consultant may give advice on what kind of policy to get, what company offers the best deal, how to blend coverage to lower commissions and how to best structure premium payments (for policies where premiums are flexible).

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Agents often don’t explain all of the options to people and may not even be familiar enough with the details of policies to do so, Daily says.

“In my experience, very few agents read the contract.”

Fee-only consultants also help with other matters, like deciding whether it’s a good idea to sell your permanent policy (which called “settlement”) and getting the best deal if you do sell. Settlement brokers may charge 6 perecent of the face amount of the policy, which can translate into 20-30 percent of the actual sales price, Daily says.

The broker then generally gives half or more of that to the insurance agent who brought in your business, he adds.

Daily charges a fee to help people decide if settlement is the right decision and then brings in a broker who charges 10% of the sales price.

“Because I’m getting paid something, I can afford to discuss other possibilities with the policyholder,” he says.

Weisbart says consulting a fee-only life insurance consultant is a good idea if people are concerned that commissions may lead to conflicts of interest. He adds that, whether talking with an agent or consultant, people should understand what they’re getting into, rather than just going along with that they’re told, and find someone else if they’re not getting good answers.

Weisbart also notes that, because commissions are mostly based on first-year premiums, agents have little incentive to check in with customers in subsequent years.

A fee-based consultant might be more likely to initiate such a review, which is important, because life insurance is a long-term proposition, and needs change.

“It’s somewhat unlikely that something you bought 20 years ago will still be appropriate for your needs,” Weisbart says.