Insurers generally sell their products either directly to the client or through a third party – also known as an intermediary. One specific type of intermediary is a broker or financial advisor – these are people who sell insurance products in exchange for a commission which is usually paid by the insurer but could also be paid by the client. As it turns out, buying insurance through a financial advisor is likely cheaper than buying directly from the insurer. There are a few reasons for this phenomenon.
1. Advisors are in a good position to compare prices across a number of insurers.
They are also able to influence the prices insurers charge. This pressure from brokers forces insurers to lower prices on their products. This generally applies to brokers who are truly independent as opposed to agents who receive a salary from the insurer.
2. Cancellations are expensive
People who purchase their insurance through advisors are generally considered by insurers to be less likely to cancel their policies. Certain policy cancellations create losses for the insurer. In order to counter this, insurers may add an additional charge to those who buy their policies directly.
3. It has to do with ‘sophistication’
Clients who buy insurance through advisors are generally considered to be more sophisticated and tend to have lower claims than those who buy directly from the insurer. The validity of this point will depend on the type of insurance being sold.
A good way to test the claims made above would be to obtain insurance quotes from a price comparison website and then compare these with quotes you get from an advisor. One thing you would have to be careful of is using an advisor who is only interested in maximising their commission and not necessarily getting you the best deal possible. The art of choosing an advisor is an important one and merits its own article but usually asking around among friends and colleagues may be a good way to start the search.