The Levels of Commission Agents Earn on Annuities
Annuity commissions are the amount an insurance agent is paid for selling you an annuity. The insurance industry has never adequately addressed the topic of annuity commissions. The industry has also earned a questionable reputation with unregulated sales practices and by offering ultra-complex products like variable and indexed annuities.
Changes have been made in the industry, but it's still important to ask questions about commissions if you're considering an annuity. It's essential for the insurance industry and its agents to be upfront and transparent about how the selling agent gets paid, and how much.
Annuity Agent Commissions Are Built Into the Policy
With life insurance and annuity products, the commission paid to the selling agent is typically built into the policy. Insurance companies issue annuities, and if you put $100,000 into an annuity, you will see $100,000 on your statement, and $100,000 will go to work for you.
This might naturally lead you to wonder how the annuity agent gets paid. Let’s make this as clear as possible: the agent does get paid. Don’t let agents get away with semantic word games by saying phrases like, “I never charge a fee.” The agent may not be getting a fee directly from you, but the agent is likely being paid a percentage of the amount you deposit in your annuity.
If you have concerns about an agent's motives, you can report the agent (or their insurance company) to your state insurance department. The NAIC can point you to the right department for your state.
Correlation Between High Commission Payments and High Surrender Charges
A simple rule of thumb to remember about annuity commissions is that the longer the surrender charges last, the higher the commissions. Surrender charges are a penalty you pay if you withdraw money from the annuity within a specific period. The penalty typically goes down over time. When it comes to commissions, an indexed annuity with a 10-year surrender charge period usually pays a higher commission than an indexed annuity with a five-year surrender charge.
This rule primarily applies to deferred annuities like a variable, indexed, or fixed rate. The one deferred annuity it doesn't apply to is a longevity annuity (a.k.a. deferred income annuity (DIA)). Regardless of how long you choose to defer the start of the income stream from a DIA, the commission paid to the agent is the same.
Fixed Annuities Have Lower Commissions
The other rule of thumb with annuities is that the more complex the annuity is, the higher the commission typically is to the agent. Single-premium immediate annuities (SPIAs) and longevity annuities are simple products and pay a low commission. Variable annuities (VAs) and fixed-index annuities (FIAs) are complex in design and typically pay a high commission.
It’s not surprising that over 75% of the $200+ billion annuities sold every year are complex, high commission variable and indexed annuities. These products have the highest potential returns, but the high commissions may tempt agents to push people into products that may not be the best fit.
Paying High Commissions May Not Benefit You
Commission payouts to agents and advisors depend on a few variables like where they work and whether their employer takes a cut of the commission earned. Without going into the details of carrier bonuses, overrides, and other forms of compensation, let’s cover the commission ranges of the five most popular annuity types.
Variable Annuities (VAs) Have Steep Commissions
The typical surrender charge period is five to nine years, so normal commission levels could be 4% to 7%. Payouts also depend on the specific carrier.
Fixed-Index Annuities (FIAs) Also Have Steep Commissions
Even though indexed annuities can have as short as a four-year surrender period, the vast majority of FIAs are sold with a 10-year surrender charge. A 10-year FIA typically has a commission of 6% to 8%. Some FIAs have a 15-year surrender charge, so you can only imagine how high those commissions are.
Single-Premium Immediate Annuities (SPIAs) Have Low Commissions
These simple income products have no moving parts and pay the lowest commission to the agent. Typically, the commissions on an SPIA vary from 1% to 3%.
Longevity Annuities (DIAs) Have Low Commissions
These deferred income annuities are simple and resemble an SPIA in structure. The commissions on a DIA range from 2% to 4%.
Fixed-Rate Annuities Have Low Commissions
These CD-type annuities typically have no fees and have surrender charges that range from three years to 10 years. Commissions range from 1% to 3%, depending on the policy term.
Protections for Annuity Consumers
If you're concerned about agent commissions, it's understandable. The National Association of Insurance Commissioners passed new regulations in 2020 to help make sure agents are acting in your best interests and not their own. Most states have adopted these revisions. They include requirements for agents to provide disclosures to consumers and disclose any conflicts of interest.
Does this mean agents won't be motivated by commission? Probably not. You can, and should, ask about your agent's commissions. If the annuity agent says that they charge no fees, stop them mid-sentence and tell them to stop playing word games. Annuities do pay commissions, but it is a net transaction to you. Those are the facts. Make sure you are getting the best benefits no matter what the commission structure is.