Insurance is a necessity of life, but it can feel burdensome to business owners. Not only do they have to pay high premiums for good coverage, they have to carry multiple personal and business policies. If you’re like most business owners I know, you feel “insurance poor.” However, if you understand the distinction between a captive vs independent insurance agent, you can actually reduce the cost of your insurance.
To know how to reduce your insurance costs, you must understand the way insurance is sold. Yes, I used the word, “sold.” Unfortunately, no one wakes up in the morning and says, “I need to buy insurance.” No one thinks that way. So instead, insurance companies hire agents, or brokers, to go out and pitch or sell their policies and products to you and me.
The basic difference between a captive vs an independent insurance agent is how many companies they represent. I use the word “captive” because this type of agent typically represents one insurance company like State Farm, All State, Farm Bureau, etc. In fact, these agents are often employees of the company they represent. They’re not allowed to go out and represent other agencies. Instead, they represent that one particular company, and they are there to sell that one particular company’s products or services. Because of that, captive agents usually get paid a salary or a salary plus commission.
Unlike captive agents, independent agents represent multiple insurance companies. They do not receive a salary from one company. Instead, they receive commissions when they sell different companies’ policies and products. Essentially, their job is to broker a deal between you and an insurance company that provides you with the best coverage for the best value.
Although captive and independent insurance agents are trying to meet your needs, they are not fiduciaries. In other words, they are not required to act in your best interest. Honestly, as employees of insurance companies, captive agents are encouraged to act in their employers’ best interest, not their clients’. They may have two, three, or four types of policies, but they don’t necessarily have to offer you the most affordable policy. They can find and offer you one that will suit your needs and give them a big commission. Similarly, insurance agencies often incentivize independent agents to sell certain products and services by offering higher commissions on those policies.
Now, I’m not saying that insurance agents only offer you policies and products that make them the most money. That would be nefarious in nature. Yet, insurance agents are salespeople. Many only make money when they sell products and services, or they make extra money when they sell certain products and services. Obviously, they want to make a “good sale.” In general, though, insurance agents also want what’s best for their clients. They are good people who represent good companies with good quality controls in place. However, since they are not fiduciaries, they work on the premise of suitability rather than fiduciary. In other words, they will find you a product or service that will “suit” your needs.
Let me explain how suitability works.
Let’s say that I ask my wife for a cup of coffee. If I’m getting on the tractor, Emily will put my coffee in an insulated cup with a special lid on it that seals and prevents spilling. If I’m going for a walk, she’ll put the coffee in an insulated cup with a lid on it, but she won’t necessarily use the super tight lid she’d give me if I were going on the tractor. Yet, if I’m just going to sit at the kitchen table to eat my grits, eggs, bacon, and toast, Emily will hand me my coffee in a porcelain or ceramic mug. When we have lots of guests over, she’s even been known to hand me my coffee in a red SOLO™ cup. Essentially, Emily is going to try to put my coffee in a cup that will be “suitable” for my needs.
If I went to a captive agent for this metaphorical cup of coffee, I’d say, “I need a cup of coffee.” He might reply, “Well, we have a SOLO™ cup that’s insulated in nature, or we have a porcelain mug, or we have a mug with a lid. It doesn’t seal, but you can put a lid on this mug.” Well, what if I really needed an insulated cup with a lid that seals? The agent may or may not offer that type of cup. Instead, he’s providing me with a “suitable” recommendation.
At that point, I might ask an independent insurance agent for the cup of coffee. She would say, “Well, if you’re going to be on your tractor, you’ll be bouncing around. You need a coffee cup that has a lid that can seal and will stay locked. Let me see which company offers you that product.” Since she’s representing multiple companies, she will probably find the type of “coffee cup” I need. It will suit my needs. However, it might come at a higher price than the policy the captive agent offered me.
So before you can decide which type of agent will save you the most money or offer you the best policies, let’s nail down the differences between captive and independent insurance agents.
If you understand the way insurance agents are paid and their responsibilities, then you understand when to use certain ones. Let’s boil it down:
Ultimately, when insurance agencies compete, you win. If you have time to comparison-shop, do that. If you don’t, let an independent agent do the shopping for you. You want to find policies that cover your specific personal and business risks, but you don’t want to pay an arm and a leg for those policies. Obviously, search for the products you need first. Then, compare prices. Doing that could save you time and money, and business owners are always up for that.
This article is part of the Risk Management area of our constantly growing series: Personal Finance for Business Owners. Expand your wealth-building knowledge by heading over today!