Traditional Fixed Annuity Commissions
Fixed annuities are insurance policies. These policies provide income for you during your retirement. But, prior to your retirement, they function like a long-term savings account. Fixed annuities are sold through an insurance agent broker system. The broker sells you an annuity and earns a commission for his effort. As a consumer, you should understand how fixed annuity commissions work.
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First Year
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When you first deposit money into the fixed annuity, the agent earns a commission on the amount you deposit into the annuity. This commission depends on the term of the annuity contract (the length of time you must hold the annuity), as well as the agent's particular contract with the insurer. Annuity commissions might be 1/2 percent, or they may be 5 percent or more. So, if you deposit $100,000 into an annuity, a 1/2 percent commission would be $500. A 5 percent commission would be $5,000.
Subsequent Years
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Agents do not normally earn commissions on annuities beyond the first year unless you deposit more money into the annuity. Any time you make a deposit, the agent earns a "trailing commission." This commission may be set by the insurer at the same percent as the first year commission, or it may be a smaller percentage.
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Significance
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It's important to note that the commission is not taken out of your annuity account balance. Instead, the insurance company factors in the cost of the annuity's commission into the product itself. The insurer may use a maturity date and surrender charges (similar to a bank CD) to recover commissions if you cash out the annuity prior to a date specified in the annuity contract. Alternatively, the insurer may lower the interest crediting rate of the annuity based on the amount of commission paid to the agent.
Consideration
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When purchasing a fixed annuity, ask if the agent earns a commission. If so, ask how much. The commission percentage will tell you how the agent stands to benefit based on the sale of the annuity. A higher commissioned annuity might incentivize some agents to sell annuities even though the interest crediting rate is lower than what is available elsewhere in the market. You should get several quotes for fixed annuities to find the highest paying annuity policy. If you are worried about whether you are getting good advice from your agent, ask what the agent earns on the annuity and compare that to other products and what is paid to the agent on those products.
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