Annuities Pay a Commission
to the Selling Agent
Yes, and there is nothing new under the sun here, at least
not in the financial services industry, that is.
The many - sided argument for and against commision -
based sales has gone on for decades.
As a consumer you can often sense "commission breath" from salespeople, whether that be the shoe
salesman in retail, the banker offering you "free checking" or even the waiter offering you desert.
What is key about a sales transaction, of course, is how you are feeling when you are in the middle of it.
Is the agent proposing the annuity transaction to you giving you a thorough education, exhibiting unlimited
patience, sensitivity and professionalism as well as answering concerns in an objective manner such that his wage is the farthest thing from your awareness?
If that is the case, you probably have a good consultative agent on your hand, a potential valuable colleague in your corner and a laborer worthy of his wages.
On the other hand, if you sense someone whose agenda
precedes yours, and you have not given the agent your
emotional permission to be presented a product or
service, then you have a salesperson exhibiting a case of
As consumers we have all experienced this, and for
many of us in business - we have at least once been
guilty of its perpetration - until we "grew up ! "
Much of the criticism leveled at insurance agents getting
paid commissions often tends to come from securities
brokers who collect on average, "only" 1% for assets under
management each year, whether your account goes up or
Whether your agent only sells insurance products, or
whether he sells securities such as stocks or mutual funds, etc, he is still getting compensated, albeit in different ways depending on how he has structured his fees.
The difference between the 2 financial service camps is simply that insurance agents can get paid a larger commission up front just once, versus a smaller one every year that your broker charges as you keep your funds with him.
Insurance agents selling annuities, by the way, are able sometimes to structure their commissions in the same way as securities brokers (this is known as a "trail basis"), although I am unfamiliar with a commission as high as 1% for every year of an annuity contract for an insurance agent. Some annuities go for as long as 14 years, which would mean a 14% commission at 1% a year, which I have never heard of.
Often you will hear insurance agents suggest that "you do not pay for the commission".
Although there is an element of truth to that suggestion (insofar as 100% of your payment earns the accredited interest rate or indexing credits) the reality is that the commission has already been built into the pricing of the policy, of course. It is simply not as easy to recognize.
A mutual fund salesperson, on the other hand, often charges his fee or commission right from your investment, so it is easier to see.
But in my years of experience, the average mutual fund guy and the average insurance guy probably get paid quite similar, although even this statement has significant variance.
After all, there are 15,000 plus annuities in the US as well as probably half of that amount (7,000 or so) in mutual funds, each with a different level of compensation.
The tangible consideration or consumers is always if the commission charged is worth the result gained.
The purest result of an annuity purchase is the guarantee of annual principal protection as well as some annual crediting of interest.
On the other side, the brokers managed account fees should yield superior returns, although with an element of principal risk.
You, as the consumer, must decide whether those prices are worth paying for the result you seek.
Typically, the longer the annuity the annuity, the higher the commission. That is not necessarily a bad thing, since a longer term annuity may provide more opportunity for the insurer to offer higher interest as well as higher index crediting rates. My experience in the annuity world tells me that, on average, an annuity agent would make 1/2% a year on a deferred annuity contract, if he chose to take his commission annually.
I would add that high surrender charges, sometimes, but not always, can indicate a high commission annuity. (Sometimes the surrender charges reflect large bonuses that the insurer provides to the owner as well). But this is a consideration for those fearful of a "loaded, or inferior" product.
Surrender charges only come into play by the way if you cancel your contract prior to its term or withdraw more than the annual liquidity provisions allow.
To conclude, far more important than the issue of the agents commission are the features and benefits of the contract you are studying.
Keep studying to get comfortable with the subject of annuities.