DEFINITION OF ‘COLLECTION COMMISSION’
The percentage of premiums that an agent is owed for collecting life insurance policy premiums. Collection commission is typically set as a percentage on the amount that is collected, subject to a cap on the total amount of commission that can be paid for a particular time period or payment batch.
INVESTOPEDIA EXPLAINS ‘COLLECTION COMMISSION’
Insurance agents have a variety of job duties. On the sales side, insurance agents are charged with selling policies, collecting premiums, and servicing existing clients. Agents may be paid a base salary, but in many cases the majority of income comes from commissions. Several types of commission arrangements may be followed, including a commission on the amount of premiums that are actually collected and a commission on the amount of new policies that the company underwrites.
Insurance companies may organize their business along a debit system. This means that the insurer assigns agents to specific geographic area, and requests that the agents sell policies on the insurer’s behalf. When the agent makes a sale, he or she has the opportunity to collect a commission. However, this commission fee may be dependent on the premium being received by the insurer.
The frequency of premium collection depends on the insurance company, the type of insurance policy, and the background of the policyholder. Some life insurance policies have monthly premiums, while others may require premiums to be paid each week or every other week. The collection commission rate may vary according to how frequently the premium has to be collected.
Insurance agents working under a collection commission system are more likely to serve low-income households. These households may not be able to afford to pay the annual policy premium in full, and will instead pay smaller amounts more frequently. The type of life insurance policies may also differ from standard life insurance policies, and may come with a smaller benefit.