Chargebacks Explained, and Best Practices to Avoid Them
Few things sting like a chargeback. You made the sale, the commission hit your account, and months later part of it comes back out. For new agents, a few chargebacks in a row can turn a good month into a debt. The good news: most chargebacks start with something you can see coming, and good habits prevent a lot of them.
What a chargeback is
Many life and final expense carriers pay an advance. Instead of paying your commission month by month as the client pays, the carrier pays several months up front when the policy issues. One brokerage describes advances of 9 to 12 months of commission at issue (PSM Brokerage).
That money is not fully earned yet. You earn it as the client keeps paying. If the policy lapses, is cancelled or is rescinded before the advance is earned, the carrier takes back the unearned part. That is a chargeback (Kadence).
Chargeback windows commonly run 12 months, and some carriers extend them to 24 months (Kadence). Some carriers use tiers, charging back the full advance for an early lapse and a smaller share later in the first year (CommissionSight). The exact rules are in your carrier contract, and they differ from carrier to carrier.
The free look period
Clients can also return a new life policy for a full refund during the free look period. The NAIC buyer's guide says this is usually 10 days after the client receives the policy (NAIC), and some states allow longer. New York, for example, sets a minimum of 10 days and a maximum of 30 (New York DFS). A policy returned in the free look period means a chargeback. More importantly, it usually means the client never really understood or wanted what they bought.
Medicare Advantage works differently
Medicare Advantage compensation has its own federal rules. Plans must recover compensation when a beneficiary makes any plan change within the first three months of enrollment, known as rapid disenrollment. When that recovery applies, the entire compensation must be recovered (42 CFR 422.2274).
The same rule lists exceptions. Recovery does not apply, for example, when a client moves out of the service area, becomes dually eligible for Medicare and Medicaid, gains employer coverage, or passes away. It also does not apply when someone enrolls effective October, November or December and then uses the Annual Election Period to change plans for January 1 (42 CFR 422.2274). Plans also recover compensation for any period a beneficiary was not actually enrolled.
The lesson is the same as with life insurance. If the client leaves the plan you put them in within a few months, the plan probably wasn't the right fit, or it wasn't explained well.
Why chargebacks happen
- The client was oversold. The premium fit the moment, not the budget.
- The draft date doesn't match payday. A draft that hits before the check arrives bounces.
- The client didn't understand the policy. Waiting periods, graded benefits and plan networks surprise people later.
- Buyer's remorse. A family member questions the purchase, and nobody from the agency follows up.
- Another agent replaces it. A client you never call again is a client someone else will.
Best practices to avoid them
Fit the premium to the budget. Walk through monthly income and bills with the client before you quote. A smaller policy that stays in force serves the client better than a bigger one that lapses in month four.
Match the draft to the deposit. Social Security pays on a schedule based on birth date: the second Wednesday for birthdays on the 1st to 10th, the third Wednesday for the 11th to 20th, and the fourth Wednesday for the 21st to 31st. Some people are paid on the 3rd instead (Social Security Administration). Set the draft for a day or two after the deposit.
Explain it in plain English, twice. Cover the benefit, the premium, any waiting period and the draft date at the table, and again on a follow-up call.
Make a welcome call. Call within the first week to confirm the policy arrived and answer questions. It's one of the best ways to catch problems during the free look period.
Watch the first draft. Check that the first premium cleared. If it didn't, call the client the same day and fix it before the carrier's grace period runs out.
Stay in touch. A short check-in call, a birthday card and an annual review keep you as their agent.
For Medicare, check the fit before you enroll. Confirm doctors, prescriptions and pharmacies, and the client's eligibility, before the application. Document the Scope of Appointment and follow your carriers' compliance rules.
Why your upline matters here
Chargebacks are where a weak agency shows itself. MLM-style organizations that push volume, cheap leads and fast closes tend to produce more lapses, and the agent pays the price. Ask any upline how they handle chargebacks, reserves and debit balances, and get it in writing. As an independent agent who owns your book, every policy that stays in force keeps paying you and builds the business that's yours.
Practical next steps
- Read the advance and chargeback section of every carrier contract you sign.
- Write each client's deposit date in your notes, and set drafts to match.
- Make a welcome call within seven days of every sale.
- Check every first draft, and keep a weekly list of pending lapse notices.
- Track your persistency by carrier for at least 12 months.
This article is general information, not legal or tax advice. Advance terms, chargeback schedules and Medicare compensation rules vary by carrier, product, state and year, and can change. Check your own contracts and current CMS guidance.
Ready to work independent?
Request life, final expense and Medicare contracts at street level. Own your book. One contract is fine.
Start my contracting request →