The Levels of Commission Agents Earn on Annuities
The topic of annuity commissions has really never been adequately addressed. I’m not sure if there is some hidden code of secrecy in the industry, or if agents just don’t want their clients to know.
The annuity industry has earned their bad reputation with unregulated sales practices, along with ultra-complex products like variable and indexed annuities. Hopefully, that will change in the future, and I think it is as important for the industry to be upfront and transparent about how the selling agent gets paid, and how much.
Annuity Agent Commissions Are Built Into the Policy
With all life insurance and annuity products, the commission paid to the selling agent is actually built into the policy. Annuities are issued by life insurance companies, so 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.
But let’s make this as clear as possible, the agent does get paid. Don’t let them get away with semantic word games by saying such intellectually insulting phrases like “I never charge a fee.” That is utterly ridiculous, and in some real-world circles, would be called an absolute lie.
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, the higher the commissions are paid to the agent. For example, an indexed annuity with a 10-year surrender charge period pays a higher commission than an indexed annuity with a 5-year surrender charge.
This rule applies across the board, and primarily addresses deferred annuities like a variable, indexed, or fixed rate. The one deferred annuity it does not apply to is a Longevity Annuity (aka 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 Compared Variable or Indexed Annuities
The other rule of thumb that holds true with annuities is that the more complex the annuity is, the higher the commission to the agent. Single Premium Immediate Annuities (SPIAs) and Longevity Annuities (Deferred Income Annuities – DIAs) are simple products and pay a low commission. Variable Annuities (VAs) and Fixed Index Annuities (FIAs) are complex in design and pay a high commission.
It’s not surprising that over 75% of the $200+ billion annuities sold every year are the complex high commission variable and indexed annuity types. That’s unfortunate, but I feel that there will be a push by the consumer toward simplicity as demand continues to grow for contractually guaranteed annuity type transfer of risk strategies.
Paying High Commissions May Only Bring the Benefit of Buying Your Agent a Car
Commission payouts to agents and advisors depend on a few variables like where they work, and if 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 5 most popular annuity types.
Variable Annuities (VAs) Have Steep Commissions
The typical surrender charge period is 5 to 9 years, so normal commissions 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 have as short as a 4 year surrender period, the vast majority of FIAs are sold with a 10-year surrender charge. Let’s just say that the commissions are high, which explains why every Tom, Dick, and Harry agent just happens to lead their sales pitch with a 10 year FIA. The 10 year FIA typically has a commission from 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 simplistic 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 simplistic future income strategies which actually resemble an SPIA in structure. The commissions on a DIA range from 2% to 4%.
Fixed Rate Annuities (MYGAS) Have Low Commissions
These CD type annuities have no fee and have surrender charges that are generally as short as 3 years and up to 10 years. Commissions range from 1% to 3% depending on the policy term.
So, the next time an annuity agent says that they charge no fee, 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.