What is the Average Commission for Selling Annuities?
For the average consumer, among the biggest knocks against annuities is that the commission is too high for the agent that sells them, not to mention that the fees themselves are much too high. The argument is used frequently against any type of annuity, without a genuine understanding of the fee structure or comparison to other types of financial products.
In this article, we will try to impartially explain how annuity commission is calculated and paid to agents, and what effect those commissions have on the policyholder, if any. The examples provided are standard for the majority of insurance carriers and annuities, and are similar to what you might learn in insurance school prior to taking the state insurance exam. However, as we will see, there are exceptions to every rule.
Commission Amounts
Commissions for an annuity can range from 2% to over 10%. The general guideline when it comes to paying commissions for annuities is that the more complex the product, the greater the commissions for the agent selling the annuity. If the annuity contract is a basic multi-year guaranteed annuity that provides the policyholder a fixed rate of interest for a specified time frame, the commission will generally be less, or around 2% to 3%. If the contract is more intricate and for a longer term (like an index annuity, for example) the commissions will tend to be on the higher side. The multi-year guaranteed annuity is more of an off-the-shelf type of product, requiring little in the way of detailed explanation, while the index annuity may have a much longer surrender period and many moving parts.
Does this mean an individual should only purchase the basic, lower commission annuity products? The answer isn’t so simple. The right annuity to purchase is entirely circumstantial to the needs of the buyer, of course. For example, If you purchased a 10 year fixed annuity now, the interest rate would be about 4.3%, which will stay the same for the life of the annuity. But, if you were to buy an index annuity, there is the possibility or a much greater rate of return because the interest rate is index-tied, such as to the Dow Jones, NASDAQ or S&P. Additionally, there may be other benefits such as nursing home assistance, enhanced death benefits or income riders with the index annuity. While the total value can be much greater for the policyholder, it’s important to note that because the index annuity is tied to fluctuating indexes, the rate of return can also fluctuate—meaning higher OR lower rate of return.
Who Pays the Annuity Commission?
The answer to this question is that the insurance carrier issuing the annuity pays the commission. As a policyholder, you would generally not pay a separate fee to the agent or financial planner selling the annuity, nor would any additional money for commission be deducted from your account. If you funded an account of, say, $50,000 for an annuity contract with a 3% commission, the amount on your first statement would still be $50,000. The commission is “built-in” to the product. Though as a safety measure against the possibility of the early surrender of the annuity before those commission costs can be recovered, the insurance carrier imposes a surrender change upon early termination.
The surrender charge is a fee applied to the value of the annuity. This penalty fee is reduced over the length of the contract until it’s fulfilled. However, so long as you allow the investment to grow for the length of the contract, you should not expect to pay a surrender charge.
Residual "Trailing" Commissions
In addition to the commissions mentioned above, annuity contracts also pay agents residual or “trail” commissions. Upon the anniversary of the annuity contract, the agent will receive a nominal commission, usually less than one percent, though many insurance companies do pay a greater residual commission. For as long as a policyholder keeps the annuity contract in place, the agent will receive a residual trail commission. And the more annuities that are sold, the higher the aggregate residual income the agent may receive.
Bonuses and Trips
Just about every annuity provider and life insurance carrier offers brokers and agents the chance to receive substantial contingent bonuses that may come as vacations and/or additional income. To encourage agents to sell more of their products, insurance companies will set annual sales goals for a target number of new policyholders, additional premiums received, or new accounts placed. The agents that meet or exceed these targets can earn significant additional bonuses paid for by the insurance carrier as compensation for being among the top producers for that company.
For the average consumer, among the biggest knocks against annuities is that the commission is too high for the agent that sells them, not to mention that the fees themselves are much too high. The argument is used frequently against any type of annuity, without a genuine understanding of the fee structure or comparison to other types of financial products.
In this article, we will try to impartially explain how annuity commission is calculated and paid to agents, and what effect those commissions have on the policyholder, if any. The examples provided are standard for the majority of insurance carriers and annuities, and are similar to what you might learn in insurance school prior to taking the state insurance exam. However, as we will see, there are exceptions to every rule.
Commission Amounts
Commissions for an annuity can range from 2% to over 10%. The general guideline when it comes to paying commissions for annuities is that the more complex the product, the greater the commissions for the agent selling the annuity. If the annuity contract is a basic multi-year guaranteed annuity that provides the policyholder a fixed rate of interest for a specified time frame, the commission will generally be less, or around 2% to 3%. If the contract is more intricate and for a longer term (like an index annuity, for example) the commissions will tend to be on the higher side. The multi-year guaranteed annuity is more of an off-the-shelf type of product, requiring little in the way of detailed explanation, while the index annuity may have a much longer surrender period and many moving parts.
Does this mean an individual should only purchase the basic, lower commission annuity products? The answer isn’t so simple. The right annuity to purchase is entirely circumstantial to the needs of the buyer, of course. For example, If you purchased a 10 year fixed annuity now, the interest rate would be about 4.3%, which will stay the same for the life of the annuity. But, if you were to buy an index annuity, there is the possibility or a much greater rate of return because the interest rate is index-tied, such as to the Dow Jones, NASDAQ or S&P. Additionally, there may be other benefits such as nursing home assistance, enhanced death benefits or income riders with the index annuity. While the total value can be much greater for the policyholder, it’s important to note that because the index annuity is tied to fluctuating indexes, the rate of return can also fluctuate—meaning higher OR lower rate of return.
Who Pays the Annuity Commission?
The answer to this question is that the insurance carrier issuing the annuity pays the commission. As a policyholder, you would generally not pay a separate fee to the agent or financial planner selling the annuity, nor would any additional money for commission be deducted from your account. If you funded an account of, say, $50,000 for an annuity contract with a 3% commission, the amount on your first statement would still be $50,000. The commission is “built-in” to the product. Though as a safety measure against the possibility of the early surrender of the annuity before those commission costs can be recovered, the insurance carrier imposes a surrender change upon early termination.
The surrender charge is a fee applied to the value of the annuity. This penalty fee is reduced over the length of the contract until it’s fulfilled. However, so long as you allow the investment to grow for the length of the contract, you should not expect to pay a surrender charge.
Residual "Trailing" Commissions
In addition to the commissions mentioned above, annuity contracts also pay agents residual or “trail” commissions. Upon the anniversary of the annuity contract, the agent will receive a nominal commission, usually less than one percent, though many insurance companies do pay a greater residual commission. For as long as a policyholder keeps the annuity contract in place, the agent will receive a residual trail commission. And the more annuities that are sold, the higher the aggregate residual income the agent may receive.
Bonuses and Trips
Just about every annuity provider and life insurance carrier offers brokers and agents the chance to receive substantial contingent bonuses that may come as vacations and/or additional income. To encourage agents to sell more of their products, insurance companies will set annual sales goals for a target number of new policyholders, additional premiums received, or new accounts placed. The agents that meet or exceed these targets can earn significant additional bonuses paid for by the insurance carrier as compensation for being among the top producers for that company.