Do I Need an LLC for My Life Insurance Brokerage?

Starting a limited liability company (LLC) for your life insurance brokerage can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a life insurance brokerage, lawsuits can arise from things like a client suffering financial loss due to an employee processing their order incorrectly or claims your brokerage didn’t disclose vital information about a policy.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your life insurance brokerage seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Two people learn about life insurance from an agent

Should I Start an LLC for a Life Insurance Brokerage?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Life Insurance Brokerage

By starting an LLC for your life insurance brokerage, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Life insurance brokerages will benefit from liability protection because of potentially expensive lawsuits. There are also general business risks like workplace accidents, libel, and trademark infringement claims.

Example 1: An employee of your life insurance brokerage makes a mistake in processing a customer’s order, causing significant financial losses to the client. With limited liability protection, your personal assets are protected from any legal repercussions stemming from this error.

Example 2: A competitor sues your life insurance brokerage for stealing trade secrets or confidential information from their business. Limited liability protection can help shield your personal assets from any damages awarded by the court.

Example 3: A customer of your life insurance brokerage suffers serious injuries while on your business premises and sues your business. Limited liability protection can help ensure that you are not held personally liable for any legal damages from this incident.

Example 4: A client sues you, claiming that you reduced their coverage limits without their consent.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Life Insurance Brokerage

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a life insurance brokerage owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

For questions about tax solutions for your life insurance brokerage, we recommend scheduling a free tax consultation.

Credibility and Consumer Trust

Life insurance brokerages rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Life insurance brokerages need insurance to protect their business from potential risks associated with providing financial advice and products to customers. Insurance coverage can help ensure that the brokerage can remain financially stable if a customer decides to make a claim against them or if they are subject to any other unforeseen liabilities in the future.

Common Situations Business Insurance May Cover for a Life Insurance Brokerage

Example 1: While visiting a client’s home for an insurance review, you back your car into their garage, resulting in significant damage to the structure. General liability insurance should cover the damages and legal representation if the client brings a lawsuit against you.

Example 2: During the brokerage’s Christmas party, a client slips on a wet floor and requires emergency surgery. They are asking both you and the venue for reimbursement for medical bills. Your general liability policy should cover these expenses.

Example 3: A rival brokerage has named you in a lawsuit, claiming your new television ad implies they are unprofessional and has cost them business. General liability insurance would cover your legal fees and damages the court orders you to pay.

Example 4: To cover the cost of your new office building, you have applied for a loan. As part of the loan requirement, the bank is requiring a minimum of $1 million in liability coverage. A general liability policy would fulfill this requirement.

Other Types of Coverage Life Insurance Brokerages Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all life insurance brokerages should obtain:

Professional Liability Insurance

Life insurance is very personal, and your clients rely on your expertise to determine the coverage their family needs. If they feel you have failed them, either from errors and omissions or professional negligence, professional liability insurance policy would provide coverage for related lawsuits. The policy, also known as Errors and Omissions (E & O) insurance, covers expenses and awarded damages up to the limits of your policy.

Commercial Property Insurance

Protecting one’s business investment is a top priority when purchasing insurance. Commercial property insurance covers your assets, should a covered loss occur. If an owned building suffers damages, the policy pays the cost to repair or replace the building, as well as business-owned property kept onsite.

The property part of this policy excludes physical property if your business's rents space, but will cover the building’s contents. Renters should review their lease agreement to identify any parts of the building they are responsible for, as many policies will extend coverage with the proper added endorsements.

You can purchase commercial property insurance as part of a business owner’s policy (BOP).

Data Breach Insurance

Managing a life insurance brokerage requires collecting and storing clients’ private and personal information. This makes you vulnerable to cyber attacks, a loss excluded on a general liability policy. Company owners should consider purchasing data breach insurance to ensure additional coverage. Also known as cyber attack insurance, this policy covers damages from a data breach that results in stolen user data.

Workers Compensation Insurance

The state mandates that all businesses carry workers compensation insurance on their employees. If an on-the-job accident occurs, the policy would cover their medical bills and a percentage of lost wages. Coverage extends to the business owners, should the incident result in a lawsuit.

Workers compensation insurance is often purchased as a standalone policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance and commercial property insurance.

Read our Business Insurance article for more info.

You can start a life insurance brokerage with as little as $5,000. However, to make the most impact and succeed early, you will need to invest upwards of $50,000. This investment would go towards office space, an agency management system, insurance costs, licenses and certifications, and a website.

Visit our How to Start a Life Insurance Brokerage guide to learn more about the costs of starting and maintaining this business

Some of the ongoing expenses will include the cost of agency management systems, payroll and incentive packages, continuing education, and marketing.

Learn more about running a life insurance brokerage.

Profit for life insurance brokerages is generated through the sale of each life insurance policy sold.

Learn more about starting a life insurance brokerage.

Life insurance brokers are involved in meeting with clients to understand their needs and wants for a life insurance policy. They then connect their clients with the right policy.

The average life insurance brokerage will profit as much as $130,000 per year.

Learn more about starting a life insurance brokerage.