What is insurance rebating? Is rebating in insurance legal? Purchasing an insurance policy from a broker is always a hectic task, and this keeps you in a constant pool of tension. Well, Anybody who has ever bought a life insurance policy knows how bad rebating is in insurance but if it’s your first time purchasing an insurance policy and you have questions related to insurance rebating, then we got you covered.
Let me tell you honestly if these questions are running through your head. Then you’re not alone. There are a lot of people who ask themselves and us the same question multiple times, and honestly, so now, being a finance blogger, I need to give the right answer to this question. That is the main reason we are here with our article.
In this article, we will discuss insurance rebating. Is it legal or not? What should you keep in your mind while purchasing an insurance policy, and how to know if your broker is doing insurance rebating or not? I know you have got a lot of questions in your head but trust me; this article is all you need, so just be seated and enjoy this article to the end.
What is Rebating in Insurance?
Rebates/rebating in insurance/inducement are all the same thing. So let me explain Rebating to you in a simpler manner. Basically, Rebating is the discount offered to the policyholder by the insurance company or the broker on behalf of the insurance company while purchasing a policy. In rebating, a portion of the premium which has to be paid by the policyholder is returned to the policyholder in the form of Rebates. Rebating isn’t always in the form of money. It can also be presented in the form of gifts or incentives to the policyholder.
Rebates can result in an unfair market advantage for those insurers or insurance producers that can afford or are willing to offer the most generous or desirable rebates. In addition, there is the potential for market instability as rebates may result in consumers shopping for new coverage midterm or upon renewal in order to benefit from bigger and better rebate offers.
In simple words, the money which was given in the form of rebates saves the hard-earned money of the policyholder. When the insurance company shares the broker’s or agent’s commission with the policyholder the rebated money reduces the amount of the due payment.
In short, rebating is done so that the company can attract more and more consumers to purchase its policy. By spending a little money on rebating company ensures its long-term relationship with its policyholders. Since there is a lot of competition in the insurance market, most companies do this on purpose so that they can attract more and more customers, but the main question is that IS IT LEGAL OR NOT. Before coming to that question, I would like to give you an example of what is rebating in insurance.
Suppose Alex paid a premium of $ 1000 to an XYZ insurance company for his health insurance. But the broker or insurance agent had to benefit Alex to make them a loyal policyholder and make good relations with him. The policy agent or broker will do this because he has to beat the competition. The policy agent through whom Alex bought the policy and became the policy holder was supposed to earn a commission of $ 300 out of which the policy agent chose to encash only $ 200 and offer a rebate. A rebate of $ 100 was given to Alex so that the first premium that he’ll pay is $ 100 less.
I hope this example helped you to understand more about rebating in insurance. So let’s answer the most important question is it legal or not?
Is Rebating Legal?
As we discussed earlier, rebating is a type of gift or incentive in the form of money that an insurance company gives to its policyholders so that they can retain old policyholders or make new policyholders. But the question is, IS IT LEGAL OR NOT? So the answer is NO. No, it’s illegal and unethical to do rebating in the United States of America as well as in most countries like India, etc.
Despite being illegal and unethical many insurance companies do rebating so that they can retain old policy holders or make new policyholders. It is important for policyholders to know about what is going on behind the curtains, and companies must have some transparency about the actual policies. Consumers, or I should say policyholders in this case, should also be aware of the policy they are purchasing, like insurance coverage, price, and quality, before making a purchase. Policyholders must report any instances of rebating at any point to the respective authorities.
I hope you understand now that rebating in insurance is illegal. But wait, let me guess, and you have a question in your mind if rebating in insurance is illegal, then why do policy brokers or insurance companies do rebating in insurance? To answer this, we did a lot of research and found the answers to your questions. So let’s move on to the next question.
Why do Insurance Companies Do Rebating?
Rebating is a type of gift or incentive in the form of money that an insurance company gives to its policyholders so that they can retain old policyholders or make new policyholders. Companies do this regularly because of two main reasons. Allow me to explain those two main reasons to you.
To Reduce Competition
As we all know that in today’s world, there is a lot of competition going on. Everywhere we go, we see one thing in common, which is competition. Every sector is full of competition so is the insurance sector. Since there is a lot of competition, various insurance companies come up with new and exciting policies which can easily poach the already insurance policyholder of another company not only existing customers but new customers were also get attracted to new and exciting policies to prevent this type of circumstances various companies do rebate in insurance which a foul practice. Rebating is also unethical and illegal.
To Hold Onto Its Customers
As we discussed in the previous paragraph that there is a lot of competition going on. Everywhere we go, we see one thing in common, which is competition. Every sector is full of competition so is the insurance sector. To win this competition, various insurance companies provide gifts or incentives in the form of money that the insurance company gives to its policyholders so that they can retain old policyholders or make new policyholders. This may sound weird to you, but it’s actually true by spending a small amount from their own pockets, the insurance companies win the hearts of the customers and make them loyal to the company. Thus by spending a few hundred dollars, they get thousands of dollars.
So these two are the main reasons why companies do rebates in insurance. As we said earlier that rebating in insurance is illegal and unethical, so let’s discuss how it is unethical.
How Rebating in Insurance Is Unethical?
As we know, rebating is a type of gift or incentive in the form of money that an insurance company gives to its policyholders so that they can retain old policyholders or make new policyholders. It is highly unethical. Let me tell you why that is so
Basically, in rebating, the policy is holder is get attracted to the policy by the greed of incentives instead of actual perks, price, coverage, and quality. In other words, we can say that the purpose of providing a rebate is to attract a customer on the basis of incentives instead of the actual perks, price, coverage, and quality. Due to this practice, i.e., rebating an unfair field where this insurance company works is being made where the agents and the policyholders get involved on the basis of perks and incentives offered rather than the products, i.e., actual perks, price, coverage, and quality of the insurance policy.
Most people see rebating in insurance as a form of deception because the policyholders are attracted based on incentives rather than the actual product and services. People become blind when they hear of various incentives in the form of rebating. On the other hand, it creates a delusion in the consumers that the policy they are buying is actually good than the policy of the other company, but in reality, the policy they are buying is actually less favorable than the other on the basis of terms and conditions than the other good policies. But due to the greed of incentives, most people will buy the less favorable policy, which will harm them in the future.
In addition to this, the company that provides rebating in insurance not only plays foul, but that company also violates the anti-rebating laws. We will discuss anti-rebating laws in further sections. But if I tell you in very short, then anti-rebating laws are those laws which are formulated by the government to prevent rebating so that the customers who will go to buy the policy will get the true coverage and perks and prices that are being offered rather than the incentives provided by the company based on rebating. These laws protect consumers from getting deceived by the insurance companies.
If I sum up all the above paragraphs, then I would like to say that rebating will offer you short-term incentives, but in the long run, these incentives will harm you financially as well as mentally. So it is very important for companies to be fair and transparent towards their customers by providing them with full information rather them giving them some minor incentives in the form of rebating in insurance and keeping the policyholders in the dark.
Till now, we have seen that what is rebating? Is it legal or not? Is it ethical or not? And now, we will see what the laws that prevent rebating in insurance are.
Anti Rebating Laws
Let me tell you in a basic manner about anti-rebating laws. So anti rebating laws are those laws that are made by the government to promote fair practices by the insurance companies and brokers so that the consumers or the policyholder will not get deceived. These laws are basically enforced at the state level, and they may vary from state to state, but they have one thing in common, which is to promote fair practices by the insurance companies and brokers so that the consumers or the policyholder will not get deceived, but there are various principles and general instructions that are common between these laws.
The National Association of Insurance Commissioners (NAIC) generated a model law called the Unfair Trade Practices Act, which has been adopted in many states and on the national level. This model law prohibits the insurance company and brokers from making rebates in insurance. The penalties for violating my vary from state to state, but if we have to sum up the penalties, then I’d like to say that penalties include fines, their license may get canceled, and criminal prosecution for deceiving people may happen these laws are stringent and have very severe penalties for violating the terms and condition of these laws.
Well, there are various sections in various laws that can help to prevent inducement or rebating in insurance. If we start discussing these sections, this article will be so long you might get tired while reading it. So here are a few articles that are known and accepted throughout the country and will help to prevent inducement or rebating in insurance: -
Section 1033
This section lies in federal law, and it states that prohibits individuals with felony convictions involving dishonesty or breach of trust (“prohibited persons”) from “engaging in the business of insurance” without the written consent of an insurance regulatory official. The consent is often called a “1033 waiver” or “1033 consent.” In simpler words, we can say that a person or an individual is restricted from doing rebating in insurance or inducement because it is a type of dishonesty with the customers, and this will breach their trust. This provision is made so that it prevents insurance companies from doing inducement. This section also prevents individuals with a fraud history from working in insurance companies where they could harm and breach the trust of consumers without the knowledge of the company.
Section 2324
Insurance Law Section 2324 is a provision of the New York State insurance law that prohibits rebating and other inducements in the sale of insurance policies. The section reads as follows: "No insurance corporation doing business in this state, no agent thereof, and no insurance broker shall pay or allow, or offer to pay or allow, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of insurance, any stocks, bonds or other securities, or any dividends or profits accrued thereon, nor shall any such corporation or any officer, agent or solicitor thereof, or any insurance broker or any other person, pay or receive or give or offer to pay, receive or permit or offer to receive, directly or indirectly, any rebate of premium payable on the policy, or any special favor or advantage in the dividends or other benefits to accrue thereon, or any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever not specified in the policy contract of insurance.” In simpler words, we can say that a person or an individual is restricted from doing rebating in insurance or inducement because it is a type of dishonesty with the customers, and this will breach their trust. This provision is made so that it prevents insurance companies from doing inducement.
These are just a few examples of anti rebating law that helps to prevent rebating in insurance or inducement. Now we will see how we can identify something as rebating and how we can save ourselves from rebating so that it will not harm us in the future.
How Can We Save Ourselves from Rebating in Insurance?
So now you know how much illegal rebating in insurance is. Now let me guess you’re wondering how to save yourself from rebating in insurance while purchasing a policy. You must remember the following points so that you aren’t deceived by those incentives.
Know the Laws
Whenever you wish to buy a policy, we recommend that you must keep yourself aware of the laws, not only anti-rebating laws but also the laws that support insurance policies and their consumers. These laws may vary from state to state, but they have one thing in common, which is to promote fair practices by the insurance companies and brokers so that the consumers or the policyholder will not get deceived, but there are various principles and general instructions that are common between these laws. If you know the laws of your state about insurance policies, then it will reduce your chances of getting deceived by rebating in insurance.
Be Transparent
If you are a policy agent, then this one is for you to be transparent about the policy that you are going to sell to the consumers. Be upfront with your clients about the cost of their insurance policy as well s the charges included in the premium. If we talk about the consumers who are going to buy policies, then we suggest you read each and every word of the policy that you are going to buy and always clear your doubt with the policy agent or the insurance company.
Focus on Value
Always focus on value. By that, we meant to say that you always go for the benefits of the policy rather than the incentives given by the policy agent when he is suggesting you buy a policy. Try not to take any incentives given by the policy agent. Always focus on the value of the policy, its perks, premiums, charges, and benefits because these incentives can be perceived as rebating in insurance or inducement. Once you take these incentives, then there is no going back. If anything happens wrong, then the insurance company can use this as evidence against you, and you might face the charges as giving or taking inducement or rebating in insurance is illegal in many states. So the conclusion is you must try to stick to the values rather than the incentives.
Offer Discounts
If the insurance company or the policy agent from whom you are going to buy a policy offers you discounts on your first premium, then you must stop there because this can count as rebating in insurance. You might face the charges as giving or taking inducement or rebating in insurance is illegal in many states. If you want to take discounts, then ask the policy agent or the insurance company to offer you discounts on taking multiple policies or because of having a good driving record. Here, by driving record, we mean your credit score. If you ask discount on these two things, then this discount will not count as an inducement or rebating in insurance, but if the insurance company is giving you a discount on these two things, then something is wrong with that, and you might face the charges as giving or taking inducement or rebating in insurance is illegal in many states. So we suggest that you must take a discount on taking multiple policies or because of having a good driving record that will benefit you a lot. Moreover, this will increase your credit score too.
Keep Detailed Records
This rule is most important for the consumer, policy agent, and the insurance company. First, we talk about policy agents and insurance companies. If you guys keep a detailed record of these and be transparent with the consumers, then it shows your true value and helps you to gain more and more consumers. Always try to sell policies with rebating in insurance because giving or taking inducement or rebating in insurance is illegal in many states. By keeping detailed records of the premiums and records of your conversations or communications with the client, it shows that you are not indulging in any unfair means. Now if we talk about consumers, then you also have to keep a record of your conversations because these records will help you to maintain a good hold of your premiums and if you find anything suspicious, then you can file a case against the insurance company or the policy agent.
Frequently Asked Questions (FAQS)
Q1. What is rebating in insurance?
As we discussed earlier in our article, Rebating is the discount offered to the policyholder by the insurance company or the broker on behalf of the insurance company while purchasing a policy. In rebating, a portion of the premium that has to be paid by the policyholder is returned to the policyholder in the form of Rebates. Rebating isn’t always in the form of money. It can also be presented in the form of gifts or incentives to the policyholder.
Q2. Can you explain rebating with the help of an example?
Suppose Johnny paid a premium of $ 2000 to an ABC insurance company for his health insurance. But the broker or insurance agent had to benefit Johnny to make them a loyal policyholder and make good relations with him. The policy agent or broker will do this because he has to beat the competition. The policy agent through whom Johnny bought the policy and became the policy holder was supposed to earn a commission of $ 500 out of which the policy agent chose to encash only $ 300 and offer a rebate. A rebate of $ 200 was given to Alex so that the first premium that he’ll pay is $ 200 less. With this example, I hope you can understand rebating with more ease.
Q3. Why is rebating illegal in many states?
Since we all know that rebating is a gift or incentive in the form of money that an insurance company gives to its policyholders so that they can retain old policyholders or make new policyholders, hence in many states rebating is considered a form of deceiving people. And it can result in massive havoc for customers. They probably will buy on the basis of incentives rather than the actual benefit which are being offered in the policy.
Q4. What are the consequences of engaging in insurance rebating?
As we discussed earlier in the article that if anyone engages in insurance rebating, then the person has to have serious penalties. The penalties for violating my vary from state to state, but if we have to sum up the penalties, then I’d like to say that penalties include fines, their license may get canceled, and criminal prosecution for deceiving people may happen these laws are stringent and have very severe penalties for violating the terms and condition of these laws.
Conclusion
Glad to see you made it to the end of the article. I hope you got all the answers to your questions by now. There are a lot of people who ask us various questions related to rebating in insurance or inducement. So we did a lot of research to answer all of your questions in one place and hope you get answers to all these questions.
In conclusion, I would like to say that Rebating is the discount offered to the policyholder by the insurance company or the broker on behalf of the insurance company while purchasing a policy. In rebating, a portion of the premium which has to be paid by the policyholder is returned to the policyholder in the form of Rebates.
We suggest you keep you also have to keep a record of your conversations because these records will help you to maintain a good hold of your premiums. If you find anything suspicious, then you can file a case against the insurance company or the policy agent.
As you know now that rebating is illegal, so you must keep yourself aware of the laws, not only anti-rebating laws but also the laws that support insurance policies and their consumers. These laws may vary from state to state, but they have one thing in common, which is to promote fair practices by the insurance companies and brokers so that the consumers or the policyholder will not get deceived, but there are various principles and general instructions that are common between these laws. If you want to take discounts, then ask the policy agent or the insurance company to offer you discounts on taking multiple policies or because of having a good driving record. Here, by driving record, we mean your credit score. If you ask discount on these two things, then this discount will not count as an inducement or rebating in insurance.
Now we are happy to see you at the end of the article. I hope you got all the answers that you were looking for at the beginning of the article. We tried our best to answer all your questions with the most simplified answers, but still, if you have any doubts regarding our article, feel free to ask questions in the comment box. We will try to reach you as soon as possible. Do share this article with your friends and family, especially with those who want to know what rebating in insurance is.
