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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.

*If you have a question for Stan The Annuity Man, please send your question to stan@stantheannuityman.com.  He will answer all questions directly, and might include yours in his next Annuity123 “Ask Stan The Annuity Man” blog every Thursday.

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20 Comments

  • Raymond Perkins says:

    As I'm about to choose an annuity through a broker I found this article very helpful…thank you

  • 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

  • Thanks for the post James. Not sure about your “half truths” accusation, but I respect your opinion just like I’m sure you respect mine. Your fee argument is valid, and it’s really 6 of one and half a dozen of the other if you really compare objectively. I appreciate your passion for the FIA product, but I’m not sure you can make a blanket statement to never buy a VA. No load VAs do have their place when addressing tax deferred growth, and if the owner (or advisor) can truly manage their portfolio. From a semantics standpoint, FIA riders are not LTC…but instead should be referred to as Confinement Care….and don’t share the tax benefits of a true LTC annuity…..which I’m sure you are aware of but most consumers (and agents) are not. I was also a Series 7 broker for many years (Dean Witter, Morgan Stanley, Paine Webber, UBS), and agree with your 2008 comment. However, consumers need to fully understand that FIAs were designed to compete with CD returns, not the market….and the historical returns reflect that contractual reality. I wish you the best. Stan The Annuity Man

    • Rob says:

      Very good post. Too many times in financial services arena we have people who like to make blanket statements saying this or that product is never a good idea and that is just not true. I can think of situations where every financial product can have its place, it’s just s matter of the salesman or advisors ability to be honest with the consumer. There are many financial products I see sold that do not fit the goals or for that matter the suitability of the client, instead they are being sold but because the salesman has a product he or she wishes to sell and many will attempt trying to shove a square peg in a round hole trying to justify to themselves and others that it was a good move.

      The good thing is their are many good financial services individuals and insurance agents out there today that will give you solid advice and put you in a product that fits your needs. The key for consumers is not get hung up on returns and promises that cannot be guranteed. Consumers need to interview and believe the person advising them for the right reasons. Great site and a fair honest professional giving good solid information.

  • Frank says:

    Do not boy a fixed indexed annuity. I was sold a bill of goods, therefore, I took money out of a 401k. FIAs do not give you market like returns contrary to what any snake oil insurance agent tells you.

  • gary loving says:

    can you expect a better deal buying direct from the insurance company and allowing them to eliminate the commission, or does some sales person always get the commission??

  • 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.
    -Best wishes too all

    • Out of Patience Consumer says:

      I don’t think anyone objects to a salesman being paid for his work. What we object to is the obfuscation and deception layered on to make it impossible to understand how much the salesman is getting paid. If I don’t understand a bill I always ask questions and I don’t care whether it’s the mechanic or the doctor or the broker. I asked a perspective broker how he got paid and he never would tell me anything specific so I walked. With the web I can figure out about what the car dealer is paying Toyota for the car and then I can understand his profit, buying a mortgage is even easier due to the law, why are the brokers and annuity sales folk so reluctant to be honest an up front? Hiding their earnings source only makes me suspicious. Do people normally hide something they are proud of? Or is it a case of being proud of ripping people off and having to hide that to continue to rip off?

    • Bob Mac says:

      I have no problem with a broker making a fair commission.
      But I have a problem when the client (me) losses $900.00 of bonus money from Fidelity.
      I was never told that I would not get the bonus money if I bought the annuities.
      This is not right.
      What should I do???
      Thanks for your help in this matter.
      Bob Mac

    • Dustin says:

      Its called a vanguard total market index fund

  • jerry neel says:

    My wife and I purchased a indexed hybrid annuity 4 years ago from a agent that represents the North American company for life and health insurance. Stay clear of this company and their reps. We were promised when the Stock Market was up we could make a rate of 4 to 5% ! Well the market has had a increase for the last four years and we never have received more than a 1% rate of return…that is if you want to call 1% a return !
    Don’t buy a indexed ….so called hybrid annuity .
    You have been advised by so one who’s been there !

  • jerry neel says:

    I forgot to tell you that if you do a ten year contract…the agent gets 1% per year…that’s why they force the ten year annuity contracts.
    Beware..Beware..

  • Karen says:

    I have 600k in a variable annuity with Pacific Life that I had NO idea was being gouged 25k per year, almost 5 0/0 to SO CALLED MANAGE my conservative contract that they left 75k in a cash account for 7 years! Yes, I was blind! This is nothing less than extortion! Pacific Life made 250k in fees and I made 135k over 7 years and this is a qualified account!

    I wish to preserve my deposit and have the highest lifetime income possible. I can do a 7 year time frame but would like to start taking yearly income in 5-6 years. I have been looking at Lincoln fixed income annuity 8. What do you think please? Great article! Thank you! Karen

    • nathaniel crews says:

      I have an variable annuity with annual lifetime 5 living benefit and a death benefit that ends at age 80. The surrender period ended on 2/2016. The annual cost is now 1.75% down from 2.75%. The question; Does the agent still get a commission as long as I have this annuity? I done want him to make any more money.
      Thanks

  • Alex says:

    Having sold EIAs many years ago, owned some, and now considering EIAs as part of my retirement, I’m a bit disheartened by the comments about agents misrepresenting EIAs. If they are, they should be reported to their state regulators.

    As for buying an EIA, there are basically two guarantees – 1) the principle value will never go down; 2) any annual returns (BTW I’ve had a couple of years with no returns, guess why?)will always be less than the market since the returns are in essence shared return between the two parties. Various products have different ways to calculate their shared returns. The consumer needs to spend as much time as possible to understand these options.

    This is not for everyone, but there are two main reasons why you should consider EIAs as part of your retirement portfolio. The guarantee of no loss of principle and sharing in the rate of return. Different products also offer different ways to draw from the EIA’s including lifetime income. It’s all in the level of risk a consumer want’s to take with their retirement portfolio.

    Educate yourself. Remember that when you feel something is too god to be true, it usually is. If someone guarantees you a rate of return, rethink who you’re talking with.

    Good luck

    Alex

  • John says:

    Someone is trying to sell me some annuity that I can close the account anytime and get back all my money w/o any surrender charge. How does the agent get commission if I close my account? Why would the agent sell me something that he/she may not get any commission if I close my account. Thanks.

  • Jimmy Rey says:

    I really appreciate the insight here in this post and confident it’s going to be helpful to me and many others. Thanks for sharing all the information and tips.

  • Ed Harrigan says:

    Responding to Jerry Neal. There are only so many pennies in a dollar. The split is 3 ways: The company, The Owner (Buyer) and Agent. The Company will make theirs no matter what.
    The more benefits ,higher Caps, spreads, etc. built into the annuity in general, the lesser the agents compensation. The agents first responsibility is to provide the best annuity for that clients specific needs and goals. A 10 year qualified annuity (i.e.IRA) for a 60 year old who plans to retire at 70 and begin distributions is suitable and appropriate.
    Also, generally with longer term accounts, the company can afford to build in more benefits and upside.
    I’m a licensed agent and consumer who sells exactly the same annuities I purchased for myself. I do not sell, or buy a specific annuity for the compensation received, but how it provides a valuable piece to the financial puzzle called Retirement. The 10 year FIA’s I sell / own pay 6% commission which is earned by the initial planning and ongoing service provided. The question every consumer should ask any financial professional on their recommendations is ” since this is such a great account, how much of your money is invested in xyz stock, mutual fund , annuity etc., and can you show me how yours works/ is performing? Watch their faces turn red! I voluntarily show my prospects the annuities I have for my family, and explain “The Why” I own it, and what retirement solution/problem it fixes. The problem isn’t in the tool (product), but in it’s application. You can drive a screw with hammer, but a screw gun is a more efficient means to an end.
    Also, I bet Jerry’s North American Annuity came with a 10% upfront interest bonus which he failed to mention, and Jerry was seduced by the lure of free money. Again, if you received the interest upfront, the company will pay you less over the term. Personally, I don’t offer the annuities Jerry is complaining about, because I don’t sell what I wouldn’t own myself.

  • Steve Hulbert says:

    For all the above reasons is why normal people keep their money in low paying bank accounts. They feel safe about their money being in a bank.

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