Fixed-indexed annuity policies are insurance contracts that pay interest based on the upward movement of an underlying stock market index. The contract is normally sold by a commissioned life insurance agent. Because of this, you might be concerned about whether the advice you are receiving is objective and driven solely by the commissions on the product. This is a fair question, but determining how much an agent earns depends on a few factors.
A life insurance broker contracts with a general agent or managing general agent of a life insurance company. The general agent (GA) or managing general agent (MGA) then offers the insurance broker a street-level commission for one or more insurance carriers. This street-level commission represents a certain minimum percentage of the premium that is deposited into the annuity policy. Each state sets its own laws on what the maximum commission on an annuity may be, so the street-level commission will be adjusted to reflect state laws and to take into account potential overrides or bonuses. A life insurance agent contracts directly with an insurance company and works for that company and only that one company. The agent is not subject to street-level commissions. Instead, the agent is paid a commission set by the insurance company in accordance with the laws in the state that set maximum commission levels.
Overrides or bonuses represent an additional amount of money over the street-level commission paid to the broker. Overrides may not apply to agents, though agents may earn bonuses on contracts sold or premium collected as the result of total sales for a month, business quarter or for annual production.
If the commission plus bonus or override is significant, a conflict may arise. In particular, a conflict develops when a more suitable product is available, but the agent or broker sells the indexed annuity anyway due to the money he stands to make from the sale.
Some indexed annuities offer commissions that are up to 10 percent or higher on the money deposited into the contract in the first year. A smaller trailing commission may also be paid on future contributions to the annuity after the first year. These commissions are significantly higher than other types of annuity products. However, the insurance company may not offer the highest allowable commissions. Higher commissions mean that the insurer may need to restrict earnings potential in the contract, making the contract less desirable to consumers. Ask your agent to explain the earnings caps and minimum guarantees in the contract. Then, compare this with other contracts. In general, you should see that the lower commissioned products on the market have higher earnings potential for you.
- "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
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