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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