Chargeback
A chargeback is the reversal of previously paid commissions when a policy is cancelled, lapses, or is rescinded within a specific time period. Think of it as the insurance company asking for their money back when the original reason for paying the commission no longer exists.
Why does this matter? Chargebacks protect insurance carriers from paying commissions on policies that don't stick around long enough to be profitable. For agents, chargebacks create a direct financial incentive to sell appropriate policies to qualified clients rather than just chasing quick sales that might cancel later.
How it works: When you sell a policy, you typically receive commission immediately or within 30 days. However, most insurance contracts include a 'chargeback period' (usually 6-24 months) during which the carrier can reclaim commissions if the policy cancels. The chargeback amount is usually the full commission for early cancellations, or a prorated amount for later cancellations.
You'll encounter chargebacks most commonly with life insurance and annuity products, where clients might cancel after buyer's remorse, financial changes, or when they realize the product doesn't fit their needs. Property and casualty policies also have chargebacks, though they're typically shorter periods.
The biggest mistake agents make is not tracking their chargeback exposure, leading to cash flow problems when multiple policies cancel in the same month and create large unexpected deductions from their paychecks.
Example:
Mike sells a $500,000 term life insurance policy and receives a $4,000 first-year commission. Three months later, the client cancels the policy because they found a cheaper option elsewhere. Since the cancellation occurred within the 12-month chargeback period, Mike's commission is reversed. His next commission statement shows a -$4,000 chargeback, which either reduces his current month's earnings or creates a negative balance that must be repaid. This is why Mike now focuses on properly qualifying clients and ensuring they understand their policies before signing.
How Earn Base Helps
Automatically tracks all chargebacks and maintains detailed records of original commissions and subsequent reversals, helping you understand your true earnings and chargeback risk exposure.