TITLE: Rebating: A Sticky Issue

PUBLICATION: Perspectives, the premier publication of The National Association of Independent Life Brokerage Agencies (NAILBA), exploring the issues affecting wholesale brokerage agencies

DESCRIPTION: Feature article about the questionable practice of life insurance rebating


Any insurance professional worth their salt knows that rebating—the act of giving something of value to an applicant in return for purchasing a life insurance policy (e.g. sharing commissions)—is illegal in 48 states. California and Florida are the only two states that legally allow insurance agents to engage in rebating. Yet, even agents practicing in those two states risk losing their carrier contracts if they get caught offering rebates. So, why on Earth would anyone feel compelled to use this method? 

“It’s a quick buck,” says one BGA professional who prefers to remain anonymous. (We’ll call him Joe Schmo for simplicity’s sake.) “It’s just not that hard to do, and it’s very profitable if an agent gets enough applicants to do it.” However, Schmo vehemently opposes the practice of rebating, saying it’s downright bad for the insurance industry. “If you don’t have a rule against rebating, you really upset the marketplace, and make it difficult for honorable people to make an honest living. When you get someone who’s willing to give away commissions to do a piece of business, it’s like a car dealer selling cars below cost.”

Read on to learn more about rebating laws, regulations and the ethical dilemma behind this prickly practice.

Florida & California: Where Rebates are as Plentiful as Sunshine?
Not So Much.

Florida was the first state to legalize rebating in 1984. That year, the Dade County Court of Appeals struck down Florida's anti-rebating statute stating it violated the due process clause of the Florida constitution. “Florida did something interesting,” points out Richard M. Weber, MBA, CLU, AEP®, President and primary consultant for The Ethical Edge, Inc., an Insurance Fiduciary in Pleasant Hill, CA. “The state said agents may rebate; however within a ‘broad class of client,’ whatever you do for one, you must do for all. So, the first time you offer or arrange a rebate for a client, then you must do that for all clients in that broad class.”

A few years later, in 1988, California's anti-rebating law was repealed by a voter initiative (Prop 103). Unlike Florida’s rebate ruling, Proposition 103 came with no restrictions attached. “So, rebating in California was suddenly like the Wild, Wild West,” Weber explains. “California had no restrictions, which theoretically meant agents would not have to offer the same rebates for everybody, and they could do whatever they wanted.”