How Do Annuity Agent Commissions Work?

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An annuity agent commission is an amount an insurance agent is paid when they sell you an annuity. While many agencies publish their commission schedules, most are very complex. Some receive a commission for selling the annuity and are then compensated annually with "trailing commissions" or "trailing fees." Trailing fees are yearly payments to the agent from your annuity.

The industry has earned a bad name for itself with unregulated sales practices. Insurance regulators have only recently begun to address annuity commissions, but progress is being made. You should still ask questions about your agent's pay if you're thinking about trusting one with your money.

An annuity can be a great way to fund your retirement. However, it's vital for all people involved for agents to be upfront and clear about how they are paid and how much they receive.

Key Takeaways

  • Annuities agents are paid a commission based on the amount you deposit. 
  • Commissions are generally higher for annuities with longer surrender charge periods.
  • Generally, the more complex an annuity is, the higher the commission tends to be for the agent.

Agent Pay Is Built Into the Policy

An annuity is a fixed amount of money paid to you from an insurance firm. You place money into an account, and the agency invests it so that it will grow.

If you put $100,000 into an annuity, you'll see $100,000 on your statement. Most of the time, you'll see your account growing in value. You'll even receive income payments from your annuity account at the time your contract stated you would. Your agent might tell you that all you need to do is give them your money, and they will begin paying you per your contract with them. They may also tell you that you don't have to pay anything for their service.

It sounds too good to be true. However, no one works for free, and the agent might make their living doing this. You may begin to wonder how they get paid. They may not get a fee directly from you, but the agent or agency is being paid through a commission on the money you give them.

If you have concerns about an agent's motives, you can report the agent (or their agency) to your state insurance department. The National Association of Insurance Commissioners (NAIC) can point you to the right department for your state.

Agents are paid based on a schedule. Their pay is usually a percent of the amount you deposit, either on a deposit-based or asset-based option. This means that commissions are built into annuities no matter what you hear; you're paying someone to manage your money and give some back to you.

High Surrender Charges Affect Commissions

Most annuity contracts include an amount of time when you cannot access your funds without causing a penalty charge. This is because your money is tied up in investments. The agency will need to move funds around and incur charges themselves to give you the amount you want. This also takes an agent time to do, so they need to be paid as well. The period when you cannot access your money is called the surrender charge period. The penalties are called surrender charges.

Usually, the longer the surrender charge period lasts, the higher the agent's pay will be. You can still access your money if you must, but the charges can be high. If you must withdraw money from the account, the longer you can wait, the less you'll be charged to withdraw it. This is because the penalties tend to go down over time.

The rule of thumb that longer surrender charges bring higher agent pay applies to deferred products like variable, indexed, or fixed rate annuities. A deferred product is one where you receive payments in the future; immediate annuities begin paying you as soon as you give the agent your money.

An indexed annuity with a 10-year surrender charge period usually pays agents a higher commission than an indexed annuity with a five-year surrender charge. 

The rule doesn't apply to the longevity annuity, also called a deferred income annuity (DIA). No matter how long you choose to defer the start of the income stream from a DIA, the agent will receive the same pay.

Annuity Types Affect Commissions

Annuities can make payments to you because they are based on investments. The money you give the agent is tied up in these investments. Some can become very complex. Often, the more complex the annuity is, the higher the agent's payment is. This is because the annuity has to be managed so that it meets the payout you've been promised.

Single-premium immediate annuities (SPIAs) and longevity annuities are simple products. As such, they tend to have lower payments. Variable annuities (VAs) and fixed-index annuities (FIAs) are complex in design and tend to pay agents more.

It’s not surprising that over 75% of the more than $200 billion in annuities sold each year are complex, high-paying variable and indexed annuities. These products have the highest returns for the buyer. Since agents get higher payments from these products, it is very tempting for them to push people into products that pay more.

High Commission Annuities

Payouts to agents and advisors depend on a few factors. The firm they work for might have high expectations. They might even take a cut from the agent. Without digging into the fine print of carrier bonuses, overrides, and other forms of pay, here are the two types of annuities with the highest commissions:

  • Variable Annuities (VAs): The surrender charge period is between five and nine years, so normal agent pay could be 4% to 7%. Payouts also depend on the carrier.
  • Fixed-Index Annuities (FIAs): Even though indexed annuities can have as short as a four-year surrender period, many FIAs are sold with a 10-year surrender charge. A 10-year FIA might pay an agent 6% to 8%. Some FIAs have a 15-year surrender charge, which can boost agent pay to more than 8%.

Low Commission Annuities

Not all annuities have high built-in fees. If you're trying to find one with lower agent pay, make sure you read through the commission schedule. These schedules list how much agents will receive based on your age and the amount you give them. They can also help you ensure the products have lower agent payouts than their more costly counterparts. Without reading the fine print (again), here are three popular low-fee annuities:

  • Single-Premium Immediate Annuities (SPIAs): These simple income products have no moving parts and pay agents the least amount. Often, agent pay on an SPIA can vary from 1% to 3%.
  • Longevity Annuities (DIAs): These deferred income annuities are simple. Agent payments on a DIA range from 2% to 4%.
  • Fixed-Rate Annuities: These CD-type annuities can have no fees and might have surrender charges that range from three years to 10 years. Agent payment can range from 1% to 3%, depending on the policy term.

Protections for Consumers

You should be nervous about annuity agent pay. There has been quite a bit of unethical practice in the past. However, you're more protected now than you were before. The NAIC is a regulatory support group made up of insurance commissioners from each state. The group made a model for states to adopt that should help ensure agents act in your best interests and not their own.

The model includes requirements for agents to be more transparent and disclose any conflicts of interest with the products they are selling. Many states have placed the changes into their insurance regulations.

Does this mean agents won't be motivated by pay? Probably not. As long as insurance companies pay agents based on a commission, agents will want you to buy the product that pays them more. If you've ever worked under pressure on commission, you might know what people will do to get paid.

Whatever the circumstances, you should always ask how an agent is paid. Ask them how much, how often, and what can trigger penalty payments. These are the important factors for you to ask about. If the agent you're talking to can't or won't explain it all fully to you, you should find another agent or agency to help you with your money.