Agents and Brokers
You should understand the difference between an agent and a broker. An agent is someone who represents the insurer and has the legal authority to act on the insurer’s behalf. If you buy insurance, you will probably buy it from an agent. However, there is an important difference between a property and liability insurance agent and life insurance agent. A property and liability insurance agent typically has the power to bind the insurer immediately with respect to certain types of coverage. In contrast, a life insurance agent normally does not have the authority to bind the insurer but must first submit the application to the insurer for approval.
In contrast to an agent who represents the insurer, a broker is someone who legally represents the insured. Brokers are extremely important in commercial property and liability insurance. Large brokerage firms have knowledge of highly specialized insurance markets and control the accounts of large corporate insurance buyers. However, unless you are operating a business, you probably will buy insurance from an agent and not from a broker.
Some agents are independent. An independent agent is a businessperson who represents several insurers. The independent agent has authority to write business on behalf of these insurers. In contrast, the agent may be an exclusive agent. An exclusive agent is an agent who represents only one insurer or group of insurance under common ownership. For example, an agent for State Farm is an exclusive agent. Finally, some insurers sell directly to the public and do not employ agents. These insurers are called direct response insurers since they sell through the mails or other mass media, such as radio, television, and newspapers. Applications for insurance typically have access to a toll free telephone number to request an application for insurance. Examples of direct response insurers include Government Employees Insurance Company, AMICA Mutual Insurance, and Teachers Insurance Annuity Association. Since marketing costs reduced, the cost to the insurance consumer often is dramatically reduced.
In summary, private and government insurance plans are extremely important in the financial planning. You should also understand the different types of insurance policies and amounts of insurance to buy, how to select and insurer an agent, how to compare policies issued by different insurers, how to file a claim and what to do if your claim is denied and common errors to avoid in buying insurance.