Read this before setting up shop as an independent agent.
Insurance is a good business to be in, but it comes with some unique considerations. Photo: P. Maillet
Looking for a recession-proof business? Insurance is one of those industries that is largely untroubled by the state of the economy.
The reason is that most insurance products are necessary part of modern life. You can’t own a car without automobile insurance, and while your mortgage company may not require that you have homeowners insurance, would you really consider leaving the single biggest investment of your life unprotected?
The individual mandate of the Affordable Care Act ensures that there will always be a steady supply of health insurance customers. Of the major insurance types, the only one that is even considered optional by some people is life insurance — but in today’s more financially savvy world, that is less true than ever before.
But for all the reasons that insurance is a good business to be in, there are many things to consider before taking the leap yourself.
What It Takes to Set Up Shop
In many ways, insurance is no different from any other business opportunity. But it also comes with some more unique considerations. First and foremost among them is the licensing process. In order to sell insurance anywhere in the United States, you must first pass a state licensing exam. Other insurance-specific considerations include gaining appointments from insurance companies so you can sell their products.
Keep reading to see what’s required to set up shop as an independent insurance agent.
If you’ve never worked as an agent for a broker or as a captive agent for a single insurer, then you should carefully consider if you have the personality for the insurance business. Apart from licensing and product knowledge, being a successful independent insurance agent requires having the right personality for the job.
All businesses require that you be a good manager. But this business is about more than management — it’s about selling. Even if you’ve been in sales before, commission-only selling is different.
It’s one thing to be a people person who enjoys talking to anyone and has a deep desire to help people understand new things. It’s quite another to be a commission-only salesperson.
Being personable at a dinner party or on a sales floor is not the same as sitting down face-to-face with complete strangers in their home, where they have all the control, and convincing them to trust you, your knowledge, and your advice.
You must not only be able to do that, but you must be able to do it almost immediately after finishing with someone else who rejected you — and all the while knowing that if you don’t make a sale, you don’t eat.
Thriving under that sort of pressure is one of the personality traits you will need to succeed. Another equally important trait is discipline. Do you have the discipline to make the hundreds of cold calls a week necessary to build a book of business and grow a reputation as a trustworthy and knowledgeable agent?
Finally, does the fire in your belly for success burn hot enough to endure these challenges day in and day out?
If you have the right personality, it’s time to talk about getting licensed.
You must be licensed to sell insurance in each state that you plan on soliciting business. While some states allow you to transfer your license, some do not.
All states require that you take and pass between 20 and 40 hours of general insurance education courses and up to 12 hours of ethics courses before you can take their licensing exam. The courses you take must be in the state you are planning on becoming licensed in. This is because state laws vary from one to another. Many of the courses are available as online self study, self-paced programs. The cost of courses runs from $300-$500 each.
Most states require separate licenses for life, accident, and health insurance, and property and casualty insurance, as well as inland marine. Licensing tests are multi-part, which means if you pass the life, accident, and health portion, but fail the property and casualty part, you can become licensed but may not sell auto or homeowners insurance. In most cases you can retake a failed section at least one time without the need for a new application fee.
If you would like to sell variable annuities or variable life insurance, you must also complete and pass the required coursework for a Series 6 license. Series 6 testing and licensing is administered by FINRA, which is a non-government regulatory group authorized by Congress to protect American investors.
In most states if you choose to operate your business as a sole proprietorship and do not hire other agents, your individual license is usually all you need. If you plan on bringing other agents into your business, or you choose to incorporate, you may need to acquire an agency license.
Rules vary from state to state but, in most cases, no additional testing is required. However, there are applications and associated fees for becoming a licensed agency. Agency licensing is not required in most cases if you’re only hiring support staff, including office help and telemarketers.
Starting your own independent insurance agency requires start-up capital. The amount you will need can range from as little as $5,000 to $50,000 or more, depending factors such as where you’re located and how you plan to operate your business.
For example, starting your agency as a home-based business eliminates the need to pay rent, buy extensive furnishings, signage and other expenses associated with a commercial location. Even the cost of office or storefront space can differ by 100% or more from one locale to another; the difference in price between an office in New York City and one in rural Pennsylvania can differ by 200% or more.
Buying a Book of Business
The surest way to hit the ground running as a newly minted independent agent is to buy a book of business from another agent.
A book refers to the clients and their associated policies. When you purchase a book, the selling agent transfers his or her status as the agent of record for the account to you.
This means that when policyholders have a question they will call you and you are responsible for servicing their accounts even though you have not earned any commission from them as yet,
and in fact have paid for the right to provide your services for free.
You do gain the advantage of getting their renewals and any associated commissions. However, clients are under no obligation to stay with you, and can transfer their account to another agent at any time.
Other agents may sell all or part of their book of business for a variety of reasons that range from retirement to scaling back in size or relocating.
The cost per client or policy depends on the market you are in and the types of policies that are in force. A book of auto policies is worth more than a book of life insurance business because auto policies renew annually, generating fresh commissions, while life insurance does not.
Agency Management System
Like other types of businesses, there are specialized tasks and activities that must be performed on a regular basis. Agency management software is not necessary, but it can go a long way toward reducing the amount of time you spend completing administrative tasks.
Agency management software is especially valuable if you don’t have experience running an independent insurance agency since many of the features and functions of the software are designed to keep you in compliance with state laws and facilitate marketing, sales, and customer service tasks. Many packages are now leased and can cost from $50 to $300 per month depending on features.
In order to sell insurance, you need insurance. At the very least you will need a business owner policy (BOP) and E&O insurance.
A BOP can be customized with a variety of different protections for everything from your equipment to the car you use for business.
E&O stands for errors and omissions and is sometimes called professional liability insurance. It functions in much the same way as medical malpractice insurance in that it protects you from mistakes you might make — that’s the errors portion. Omissions are also mistakes you make, such as forgetting to advise a client that their policy is due for renewal.
If you hire office or support staff you may also have to carry worker’s compensation insurance depending on your state and the number of employees you hire.
Finally, you will have to secure a surety bond. A surety bond guarantees to pay one party, such as an insurance company, if you fail to meet your obligation. States require you to have a bond in the event that you collect a client’s premium and run off to Brazil with your receptionist instead of remitting the payment to the insurance company. Its purpose is to protect your clients from you.
Cluster Group Expenses
It takes more than being licensed and hanging up a sign to be an independent insurance agent. You need to be able to sell different types of insurance, ideally from several different companies.
However, unlike other businesses where suppliers will usually wholesale their products to anyone who can order them in sufficient quantity, insurance companies won’t let you sell their product until you have sold enough of their product already. If that sounds like a catch-22, that’s because it is!
The larger and more dominant an insurance company is, the higher their production minimums are for you to be able to offer their products. The way around these mandatory minimum requirements for new and small independent agencies is to sign up with a cluster group or master agency.
The cluster group is an association of sorts, comprised of independent agents who pool their business in order to qualify for appointment by top-rated insurance companies. Cluster groups offer other benefits including:
- Higher negotiated commission rates
- Discounted E&O insurance
- Agency management software
- The ability to quote specialty insurance
- Continuing education opportunities
Of course you hope to start making money the day after you open for business, but experience dictates that it takes time to get rolling and generate enough income to be self-sustaining. That is why you should allow for at least a few months of cash reserve as part of your startup costs.
Having money set aside for rent, utilities, salaries, and other expenses will help reduce your stress level since you won’t have to worry about being forced out of business before you even get off the ground.
Leaving the Fold
For some, the path to becoming an independent agent starts with working for another broker or as a captive agent.
Many insurance experts suggest taking advantage of the more secure and supportive environment offered by a position as a captive agent, saying it’s the best way to gain the necessary experience and to build a reputation as a knowledgeable professional before striking out on your own. There is a lot to be said for working under an experienced sales manager who can show you the ropes and guide you through what can be a steep learning curve.
The perks that come from working as a captive agent can come with a price tag called a non-compete agreement. These agreements, intended to keep you from learning and leaving, include clauses that restrict your ability to set up shop as an independent agent or work for a competitor. These restrictions may be bound by time limits, such as one or two years from separation, or by geography, prohibiting you from working within a certain radius of your now former employer.
State laws and court decisions vary in different states and jurisdictions. In some places they are illegal and cannot be a condition of employment, and in others they are legal but not enforced. Still other jurisdictions can and do enforce these agreements, which is why you should consult an attorney both in your current area of employment and where you plan to start your own business.
For the most part this article only discusses things that are specific to becoming an independent insurance agent. It is important to remember that all of the other components of starting a business apply as well.
That means you will have to find an accountant and a lawyer to help you register your name and decide what type of business entity you wish to be and help you do tax planning and accounting. You will need to hire a web designer to create an online presence since more often than not, which is how potential customers are most likely to find you.
Here are some more resources if you’re thinking of starting your own business: