Insurance Brokers: What They Do and Who Needs One

No matter the type of insurance you’re buying, it’s smart to get quotes from multiple insurers to find the best price. While almost anyone can compare rates online, it might make sense to have a professional walk you through your options if you have complicated insurance needs. That's where an insurance broker could be helpful.

» MORE: Car insurance quotes: What you need to know

What is an insurance broker?

An insurance broker acts as an intermediary between you and an insurer. Brokers use their expertise to find you a policy that fits your coverage needs at a reasonable price. While brokers receive commissions from insurers, they work on your behalf, not the insurers’.

Brokers specialize in different types of insurance, so you’ll want to work with one who has expertise in the type of policy you need. If you have to insure your vehicle or home, you’d consult with a broker specializing in property and casualty insurance. To insure your small business, you’d go to a commercial insurance broker.

When to use an insurance broker

Using a broker isn’t necessary for everyone. 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 properties.

• 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 who knows your background and coverage needs.

How brokers are paid

Understanding how brokers are paid will help protect you from brokers who care more about making money than placing you with the right policy. One way to avoid buying more insurance than you need is by complementing your broker’s suggestions with your own research.

Brokers can make money through commissions or broker fees. They may charge both or only a commission. Brokers often have to disclose commission rates and other fees upfront. Still, it’s smart to ask about any charges you’ll have to pay besides premiums.

Commissions

Brokers receive commissions from insurers when they place people with those companies. An insurance policy that you buy through a broker costs the same as coverage you buy on your own, since a broker’s commission is automatically included in the price of the policy.

A broker’s commission depends on the policy and company, and is typically calculated as a percentage of the premium.

Always ask how a broker’s commission works. 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 generate more business.

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. This, along with their desire to maintain a good reputation, gives brokers reason to make sure that you like and keep your policy.

Broker fees

In addition to receiving commissions from insurance companies, some brokers also charge fees to their clients. In general, broker fees must be reasonable and disclosed to the buyer. Your state might also have fee restrictions. For example, New Jersey caps broker fees for single policies at $20.

Even with a fee, you may spend less overall than if you shopped for a policy by yourself. Let’s say you work with an auto insurance broker who charges a $100 fee but saves you $250 on your annual premium. You still end up saving $150 on your auto insurance.

Broker fees are often nonrefundable, so if you cancel your policy, you won’t get your money back unless your insurance broker was dishonest.

Other ways to buy insurance

You don’t need to use a broker to get insurance. To avoid a broker fee, you can buy insurance:

• By comparing quotes online.

• Directly through the insurance company, online or over the phone.

• Through a captive agent, who works for one insurer.

• Through an independent agent, who can shop around with multiple companies.

Even if you’re working with an independent agent or insurance broker, you can still get your own quotes. Using an insurance comparison tool can help you find the cheapest price by looking at rates from multiple companies.

» MORE: How to find the right life insurance agent or broker

Insurance broker vs. independent agent

Insurance brokers and independent agents are similar, but they’re not the same. Both insurance brokers and independent agents can work with multiple companies to find you a policy. The main difference is that brokers represent you, the buyer, while agents represent the insurance companies they have contracts with.

Since agents can sell policies from only these companies, they may be limited in the coverage and advice they can give you.

On the other hand, although agents may sell policies from a select number of insurers, they might know more about certain companies and policies they sell than brokers.

Another difference is how the two make money. While both Insurance brokers and independent agents work with multiple companies and earn commissions, only brokers charge fees.

Lastly, agents, not brokers, can bind a policy. This means that agents can provide you with a type of temporary coverage before the insurance company finalizes and issues your actual policy. Finalizing your policy may take some time, so this difference might be important if you need to show proof of insurance as quickly as possible.