What is Rebating in Insurance | Definition with Purpose of Rebating Laws

What is rebating in insurance? It is the return to the insured of a portion of the premium or the agent’s or broker’s commission on the tip or other inducements to do business with a particular insurer. In most states, the government doesn’t allow rebates. Insurance companies must rely on previously submitted rate credits or support methodology.

A Rebate is a practice of returning a portion of the broker’s compensation to the insured to induce an insurance transaction. In the case of life insurance, a broker who rebates or generates a customer to purchase life insurance jeopardizes their license.

Insurance companies and insurance producers may conduct advertising or promotional activities that permit the distribution of prizes, goods, merchandise, gift cards, gift certificates, or commodities totaling no more than $100 per individual in any 12 months.

The advertising or promotional program must be available to all policyholders or prospective policyholders who meet the same qualifying criteria.

A Rebate is a practice of returning a portion of the broker’s compensation to the insured to induce an insurance transaction. Typically, the insurance broker funds the rebate.

Reimbursement is sometimes the “inducement.” On the other hand, inducement may refer to indirect compensation or advantages the broker or agent provides.

The rebate is illegal in several provinces and states. Although the legislation regulating rebates differs somewhat, the main objective is to protect consumers from insurance companies and licensed agents engaging in unfair sales practices. In the case of life insurance, a broker who rebates or incentivizes a customer to purchase life insurance jeopardizes their license.

What Rebating Mean in Insurance terms?

What is Rebating in Insurance

A Rebate is a technique to convince a prospective insurance customer to purchase a policy by returning the broker’s or agent’s expected commission as a reward or rebate for sale. In addition, the insurer may offer premium discounts or even gifts. According to insurance commissioners, this is not good practice. All this results in unfair competition and can lead to the insurer’s insolvency.

The National Association of Insurance Commissioners developed the Model Act to prohibit and penalize this conduct in the United States. This ensures parity between insurers and intermediaries of different sizes competing for the same business.

Alleviate the concern that all consumers will absorb the cost of incentives through the product’s price. This will ensure they administrate premium reductions uniformly to all equivalent risks. That means not just specific consumers.

Rebates are illegal in most jurisdictions, but they have been enacted vary. The target is the firm, broker, or agent. In some cases, a broker who offers a customer a rebate or an inducement to purchase life insurance puts his insurance license and company at risk. However, the customer could be a felon for knowingly engaging in the conduct in other cases.

Rebating according to agents

Most regulators consider rebates to provide value to a customer in various ways to purchase insurance. For example, in most states, the following could be an illegal rebate:

  • Any gift to promote the purchase of insurance. This is especially when the facility’s value is substantial compared to the premiums the potential customer will pay.
  • Commission paid to the agent by the purchaser.
  • Any premium paid to an agent or agency on behalf of a prospective client.

Purpose of Rebating Laws

What is Rebating in Insurance

The fundamental issue is that regulators often consider anything an agent puts into the buying process not explicitly stipulated in the contract as a rebate or an inducement.

In either case, the authorities enforce anti-rebate regulations to level the playing field for all producers. So, companies ensure that consumers receive the same policy terms.


The reimbursement regulations try to level the playing field for insurers. Remember, they cannot offer prospective clients a percentage of their commissions. Agents and brokers with fewer resources may not be in a position to make such an offer.

In addition, this may result in questionable recommendations of life insurance contracts based on commission percentages paid by the insurance company to the agent/broker. If one company chooses to pay a higher commission rate than another, the agent/broker may discount their potential client to win the sale.

Insurance firms vs. independent insurance producers

Reimbursement rules often refer to reimbursement in a manner that segregates insurance companies and producers (i.e., agents and brokers). While there are various reasons to distinguish between the two, the vast majority of states restrict reimbursement equally for both entities. 

Furthermore, we can assume that anything illegal for an insurance company is also unlawful for a producer and vice versa.

The reasons for the incentive are a matter of opinion.

Reimbursement seems to be a simple notion. Insurance agents cannot share their commissions with their clients. It looks to prohibit insurance agents from offering their current and prospective clients. Also, it is an incentive to purchase a life insurance policy directly backed by commissions earned on the sale. Determining which inducements are eligible for reimbursement and which are not can be extremely difficult.

Is paying for lunch during the meeting with a prospective buyer considered a rebate? What if the agent presents the check and asks, “Do you want to buy this policy or not?” before offering to pay the bill?

For most jurisdictions, the critical distinction is whether the agent or brokers attach a condition to the offer of gift or kindness. Thus, if the check for the meal arrives and the agent adds, “I’ll pay if you buy this policy,” they have almost certainly violated the discount law. Of course, that comment may be more of a joke than a genuine attempt to coerce someone into buying life insurance.

Frequently Asked Questions

What is a “rebate”?

A “rebate” is the practice of returning a portion of the broker’s compensation to the insured to induce an insurance transaction. Typically, the insurance agent finances the rebate.

What are some examples of rebates?

Brokers are associated with another company. Also, they provide additional goods or services at a reduced price to producers who purchase MPCI from them. Producers who do not buy their MPCI from them do not receive the same discounted rate.

Can insurance salespeople offer commission rebates?

Before 2002, it was illegal for life insurance salespeople to refund commissions to their customers. MAS repealed the ban on commission rebates in 2002. To do this, the company paid the premium on behalf of policyholders with the first year’s commission. In effect, this is a commission rebate.

What is an unfair rebate in insurance?

A rebate is an insurance industry practice where you give something of value to sell a policy that the policy doesn’t cover. Some states limit refunds to consumers or prospective insurance buyers.

Is the debate unethical?

Another unethical practice and one that is illegal in most states—is rebates. While many industries allow the exchange of gifts with consumers, this practice is illegal in the insurance industry.

Bottom line

Most states describe an insurance rebate as an offer or inducement made by an agent or broker. It is to entice a prospective customer to purchase an insurance policy that is not permitted under the terms of the life insurance contract.

For example, if an agent offers to share a portion of the commission with the client. It is generated from the sale of the policy. In that case, this is a rebate, which is illegal in almost all states of the European Union and the USA. A significant violation of insurance law, punishable by state regulators and insurance companies.

In most reimbursement situations, the insurer will terminate its relationship with the agent/broker. Other companies may refuse to do business with an agent/broker who has previously engaged in reimbursement.


Adam Grabois is an expert in all aspects of Insurance and Property with 20 years of experience. He is a licensed broker of all lines including property, casualty, life, and health. As a licensed adjuster, he is well-versed in all aspects of insurance, and he owns All Needs Insurance agency in Florida.

He attended Tufts University where he earned his undergraduate degree, followed by a Master's degree from Columbia University.

Adam shares his breadth of experience by helping many businesses and individuals manage risk and protect themselves financially. He now shares this with the audience of the "Pro Insurance Info" website.

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