How Do Annuity Commissions Get Paid To The Agent?
The “ Ask Stan The Annuity Man ” educational series is provided by a nationally recognized annuity critic and annuity consumer advocate. Stan The Annuity Man has over 25 years of experience in the financial services industry, and is the author of the highly acclaimed book, The Annuity Stanifesto .
Question : I’m talking to a lot of annuity agents, and can’t get a consistent answer on how they get paid. I know that they do, so how do annuity commissions work? Joe from Texas
Answer : Good job for asking that question Joe. This is an important topic and something that clients need to be aware of. I can’t understand why annuity agents just won’t tell the truth about a subject matter that should be voluntarily disclosed, and certainly not avoided. The bottom line is YES, annuity agents get paid a commission when they sell you annuity.
A common practice I have heard recently is for agents to tell you that “I never charge you a fee” or “you pay no commissions.” I hear annuity radio and TV ads fraudulently say this all of the time. This is nothing more than the agent playing word games and trying to make the potential annuity transaction sound too good to be true, or at a minimum… more palatable.
All annuities pay a commission, and that commission is actually “built in” to the product. For example, if you put $100,000 into an annuity, you will see $100,000 on your first statement. Yes, the agent got paid a commission, but it is a net transaction to you. This is how some agents justify saying “no fee”, even though that’s really not true.
It’s also important to understand that annuity commissions can range from 1% to over 10%, depending on the product. The commission correlation is easy to remember. The longer the surrender charge period, the higher the commission. The more complex the annuity is, the higher the commission. The simpler the annuity structure is, the lower the commission is to the agent. The shorter the surrender charge period, the lower the commission.
For example, long term surrender charge deferred annuities like variable annuities or fixed indexed (called “hybrid” by some internet promoters) annuities pay the highest commission to the agent. It’s somewhat predictable that the majority of annuities (over 80%) sold are these 2 long term surrender charge annuity types.
The lowest commission annuities are Single Premium Immediate Annuities because of their simplistic (yet efficient) transfer of risk design. For the record, Single Premium Immediate Annuities are the original annuity design….and still is my favorite annuity strategy of them all.
Some annuities allow the agent to choose a “trail” commission that allows him to get paid a small % annually for the life of the product in exchange for a much lower up front/initial commission. Less than half of annuities offered by carriers allow the agent to make this choice, which is a negative reflection on the annuity industry in my opinion.
So your gut feel on this was correct Joe. Annuity agents do to get paid a commission, and there is a reason that most only show you long term surrender charge annuity products. That doesn’t mean that a long term product isn’t suitable, it just means that you need to do your homework and keep asking questions until you feel fully comfortable with your decision.
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James Dubeau says:
Nice tale of half truths … Yes agents get paid a commission BUT it’s more like 4 to 7% ONE time and you earn money on the Full amount of your deposit … $100,000 deposit starts earn day one on the full $100K.
Compare that to a broker who gets 1.5 to 3% EVERY YEAR for as long as you have the account with him … and it is taken right off the top on every dollar you put in or make in the future.
Less assume the same $100k that’s not a $100k … assuming a 2% fee you have only $98K working for you … so less assume that 2% over 10 years that is 20% even if you lose money.
Since the Index Annuity (never buy a variable annuity … a broker in sheep’s clothing) can NEVER decrease in value and goes up with the gains in the index.
Which would you prefer … which has the lowest cost plus a grantee life time income if you want … some even have Long Term Care include.
I was at once what is called a Series 7 stock broker till I saw the light.
Ask your Broker what he going to do to protect you from another 2008. I can …
… 44 Years in the Financial World
Annuity Dude says:
I can appreciate peoples interest in how annuity producers are paid, although I must confess some of the comments make me a little irritable.
I completely agree that nobody should lie to prospects & clients about their earnings. I also believe, however, that the producers do deserve to be paid for their specialized advice, which might I add is advice in a highly regulated industry where the advisor is exposed to regulatory and legal risk when dealing with the public.
When people express distaste for agents receiving commissions, I have to question how the consumer would feel about working for free or a half of their salary in their personal profession? Or when was the last time that that they asked their tax attorney, their electric company, their landlord, or their doctor for a discount to provide their services?
I agree that financial sales professionals should not be gouging the public but should also be paid fairly for the impotant service they are offering. If the public does not see value in the advice offered and wants to figure it out for themselves on a self service basis – thats fine & I hope they find what they are looking for and that its appropriate for their financial well being – but please dont ask a professional for detailed recommendations or advice concerning your specific situation.
If consumers want free advice from an expert on the topic I would be interested to hear what other moderate to high return financial products are offered with no load, no profit & no commissions? If there are any I doubt they will be around for long.
Just like any other product or service in the world economy (other than charity) goes, by design its necessary for people in that industry to eat at night for the industry to exist. Just an economic fact of life in my opinion whether selling pens & pencils or whether selling financial products.