Insurance Agents: Obsolete Relics of the Past or Critical Players on Your Personal Finance Team?

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Do you all remember the days of travel agents?

I sure do! I remember that from the time I was very young until about 2004, travel agents were a pivotal part of society. In fact, I don’t think it was even possible to book a trip/travel plans without the assistance of a professional travel agent. I definitely remember running errands with my parents, and often times before a trip, one of those errands would include stopping by the travel agent’s office to pick up the tickets!

However, I think that most of us know how the travel agent story ended. The Internet became omnipresent, and quickly, Travelocity, Hotwire, Expedia, Priceline, and a host of other easy-to-use travel search engines (not to mention hotel, airline, and rental car companies themselves offering online travel booking directly) came out and made travel agents fairly obsolete. While I’m sure that travel agents do serve some roles at corporate levels or with planning trips for rich people or large parties, the days of normal individuals using a travel agent frequently are over.

Are Insurance Agents the Next Casualty of the Internet Age?   

During a recent trip to North Carolina, I saw a big sign at the side of Hwy 15 promoting the local State Farm insurance agent. And, it got me wondering if in today’s Internet age….

• Is there still is a large demand for personal, local insurance agents? 
• Also, do insurance agents add value to individuals’ lives, or do they simply drive up the cost of insurance products/services and will soon befall a similar fate to their travel agent relatives?

The purpose of today’s post will be to try to answer these questions. 

My Personal Experiences with Using Insurance Agents

To start to answer the question about whether or not personal/local insurance agents are becoming obsolete or if they are crucial for one’s personal finances, let’s take a look at how myself and the people close to me employ (or do not employ) insurance agents in our personal finances. 

• Myself
• Health Insurance – 
• Administered through my work with graduate school. No insurance agent involved.
• Homeowner’s Insurance – 
• My condo homeowner’s insurance policy was purchased and is administered through a local insurance agency. 
• When I was shopping around for homeowner’s insurance in 2010 prior to buying my condo, I did some pretty extensive searching for quotes on the Internet to get a feel for a competitive market rate for the coverage I needed. 
• In the end, I decided to go with a local agent recommended by my real estate agent because I was still a little confused about some of the detailed language of the insurance policies and figured that getting the added help of the local agent would better ensure that I obtained the coverage I needed.
• However, I have never met with the local agent face-to-face, and have only interacted with them via email. Whenever I have emailed them, they are always very helpful. 
• Nevertheless, I’m still unsure whether the questions I had (first about setting up the policy and then amending it when my girlfriend moved in to my condo) could have been answered just as effectively by calling a national provider vs. dealing with the local agent. 
• Also, it should be noted that when I originally took out this policy with the insurance agent, I did ask whether or not it would be more expensive to get the policy directly from the provider (Erie). They said it would be the same price either way. 
• My Girlfriend
• Health Insurance – 
• Administered through her work. No local insurance agent involved.
• Car Insurance – 
• Not administered through a local agent. Purchased directly from Nationwide.

• Parents
• In true old-school style, my 60 year-old parents purchase pretty much all of their insurance policies through their local Shelter Insurance agent. They have been using him for maybe 30 years or so. 
• They are very satisfied with having a local agent, and mentioned that it has been somewhat of a necessity to combat the complications of having a total of 8 insurance policies

The Current Demand Landscape for Insurance Agents

Having explored the demand and value of local insurance agents from my personal experiences, I then began searching for statistics on the usage of insurance agents on a more global or nationwide scale.

However, as I began reading through the results of this search, I soon was reminded that I had to maintain a very critical mindset to evaluate which was an objective report and which was not. Why is this, you might be asking? Well, if there’s one thing I’ve learned in the past three years with owning a home and personal finance blogging, it is this: the insurance business is extremely profitable for the people and companies that work in it. As such, one has to be careful in reading the ‘facts’/opinions of people that might be negatively affected by such a big change as the downfall of local insurance agents.

With this in mind, let’s review the findings I encountered on this search regarding the current demand for local insurance agents vs. buying insurance direct online:

• A 2011 JD Power report found that a majority of people (52%) still buy their auto insurance policies through insurance agents, although this number is decreasing each year. Conversely, the percentage of people purchasing their policies online is increasing each year, with a full 28% of purchases in 2011.
• In 2010, the Bureau of Labor Statistics estimated a faster than average 22% increase in demand for local insurance sales agents from 2010-2020.
• A 2011 LIMRA news center report found that 64% of people still purchase their life insurance policies from an agent, while 26% purchase online. 
• Even though the majority of people seem to still purchase their insurance policies from an agent, more than 50% of people now shop around for quotes online prior to visiting the insurance agent. What does this mean? It means that we as a people are becoming better informed about what a competitive price of insurance is in the market prior to buying. 

From these statistics above, I think we have clearly answered our first question to which we were seeking an answer today:

Yes, there is still is a large demand for personal, local insurance agents in today’s society.

How are Insurance Agents Paid and How do they affect prices?

While I did not dig too deeply in to the base salary levels of insurance agents, I did find quite a few reports stating that insurance agents do receive heavy commissions (anywhere from 20-85% of the premiums paid for the first ten years of the policy) from the insurance providers on the insurance policies they sell. This means that in many cases, the insurance providers are not actually making a profit on the policies sold through insurance agents, unless the prices for these policies are higher.

However, what I found, both through my personal experience mentioned above and several Internet reports, was that the price of policies purchased from the provider directly and through local agents is the same.  

So, the question then becomes: how do the insurance providers pay for these commissions to put food on the table for insurance agents (i.e. how are they passed on to the consumer?)?

Well, since the price of policies purchased directly and from agents is the same, the only way I can think of is that insurance agent commissions cause the overall price of insurance premiums to increase for everyone. In other words, everyone pays for insurance agents, regardless of if you use them or not. That seems interesting, eh?! 

Do Insurance Agents Add Significant Value or simply drive up prices?

Having arrived at the observation that insurance agents do drive up insurance prices for everyone, the question then becomes: does the amount of value added by insurance agents warrant the increase in prices that they apparently cause?

In short, the consensus among the Internet reports I found seems to be that yes, insurance agents do add a significant amount of value. In fact, it was interesting to note that I did not find ANY reports stating that insurance agents are an absolute waste of money.

Listed below is a summary of the arguments in support of the value that insurance agents provide:

• Provide access to ‘invitation only’ insurance company policies. 
• Can ask the right questions to each individual to make sure that person gets the coverage they need, especially if the person is not very well versed in finances. 
• Claims are easier to handle whenever you have a real life person inside the company that can fight for you if needed. 
• The insurance agent knows your local area. In other words, they can better advise you if for example, flood insurance or earthquake insurance is an absolute MUST. 
• The insurance agent can guide you through all of the hard-to-understand legal language present in insurance contracts. 
• Personal Note: I have read through my entire Erie Homeowner’s Insurance Policy and almost became cross-eyed at how confusing it truly was. 

Summary and Conclusions

To wrap things up, let’s just quickly review the key points we’ve learned from this investigation:

• There is still a large demand for local insurance agents in pretty much all areas of insurance, with more than 50% of people purchasing their policies through these agents. 
• However, the number of people bypassing these agents and purchasing their policies online is growing each year and may eventually overtake the market share of insurance agents. But, we are not yet to that point. 
• Paying insurance agents does drive up the global cost of insurance policies since premiums levels are the same regardless of if the same policy is purchased from an agent or direct from the provider.
• The general consensus seems to be that insurance agents provide a significant amount of value that warrants any increase in overall prices. 

How about you all? Do you still use insurance agents to purchase and manage your policies? Why or why not?

Do you think insurance agents are becoming obsolete, or will they continue to be in high demand?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/drachmann/327122302/sizes/l/in/photostream/