Annuity Commissions and Fees

Written by Hersh Stern Updated Wednesday, July 5, 2017

annuity commissions fees

The #1 question I'm most-often asked is, "Why do annuities charge such high commissions?"

It's true, some insurance companies pay their agents as much as 10% for selling certain types of annuities.

All annuity commissions are not the same

The bad rap for high commissions though belongs to annuities that are indexed to the stock market. It's important not to lump all the different types of annuities together.

For annuities that are not indexed to the stock market, the commission paid to an agent can be as low as 1%.

So how much commission are you paid?

When you buy an annuity through our service the insurance company pays us a commission based on the type and duration of your annuity. Here are some examples of the commission percentages we receive:

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Immediate Annuities and Deferred Income Annuities

Annuities with simple features and no surrender charges, like an immediate annuity ('SPIA') or a deferred income annuity ('DIA') pay a one-time commission that varies from 1% to 5% of the premium.

The exact percentage is determined by the length of the income payment period, age of the buyer, and annuity payout option selected. For example, we may earn a 3% commission on the sale of a life annuity to a 65 year old. And we may earn 1% or less on the sale of a 5-year period certain annuity to the same buyer.

It's important to note that the commission is already built into the annuity quotes you receive. So there is no additional commission or fee you pay us nor is any commission deducted from your monthly income. The quotes on our web site are net of any commission and there are no annual fees.

Multi-Year Guarantee Deferred Annuities

A multi-year guarantee deferred annuity ('MYGA') is a type of annuity that is similar to a bank certificate of deposit ('CD'). To keep the interest rates on their MYGA offerings competitive with interest rates on bank CDs, insurance companies typically pay a lower 1% to 3% commission for the sale of a MYGA annuity.

As an example, if you purchased a short term (3-4 years) MYGA through our service we would earn a 1% to 2% commission. If your MYGA was for a longer duration (5-10 years) our commission might be 3%. Generally, there are no annual fees with a multi-year guarantee annuity.

So which annuities pay agents those hefty 10% commissions you may have read about?

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Comments (8)

  1. Wayne:
    Mar 23, 2015 at 01:32 PM

    Can annuities be purchased directly from insurance companies without agent fees?

  2. Hersh Stern:
    Mar 23, 2015 at 01:42 PM

    Hi Wayne-

    Very few life insurance companies offer their annuities for direct purchase. And very few companies do not have agents.

    Those that sell directly typically price their annuities no different that when you buy the same annuities through their agents. So removing the agent's fees may not reduce your costs or increase your income.

    Why?

    The reason insurance companies rarely improve their annuity rates when you buy directly from them or through their agents is that these companies don't want to create any conflicts with their existing agents, on whom they depend to market and service their products. So while it may seem reasonable to expect better pricing, in practice, that's not what's happens.

    I believe TIAA is one of the direct marketers. I suggest you call TIAA to get an annuity quote and then compare TIAA's rates with those from the companies I represent. You'll find that even as a direct seller, TIAA's rate may not be your best deal.

    There’s a good reason for this, too: A typical agent's commission for a fixed income annuity is a one-time payment of 2% to 4%.

    When pricing its annuities, an insurance company considers many factors, including what it earns on its investments and how long it expects you to live. The range across companies for just these two factors alone can cause their annuity income quotes to vary by as much as 10% to 15%!

    So in practice, the 2%-4% commission by itself will rarely impact how much income you are paid by the company. Other variables have a much greater effect on your quote.

    There's another important reason the agent's commission is not really the determining factor in how much income an annuity will pay you. I'd like to use TIAA, again, as an example.

    While it's true that TIAA does not have an outside sales force so it may not be paying anyone a “commission”, TIAA nonetheless does have a large inside sales team who answer the phones, process requests and who are being paid nice salaries and need office space, equipment, etc. to do their work. So how different is it really if TIAA were to pay agents to sell its annuities versus paying employees to sell its annuities?

    When you look at commissions from this perspective you realize that all that's happening is the insurance company is outsourcing its sales activities to a third-party and paying that party what it would have been paying it own sales team.

    From the agent's perspective, the commission helps him to recover his operating and overhead expenses. And yes, there's a profit margin to pay him for taking the risk that he may not earn anything if his products are not attractive.

    -Hersh

  3. James:
    Aug 21, 2015 at 03:24 PM

    Hi Hersh -

    I find it hard to believe there are no fees when I buy an immediate annuity. I know you said there are no upfront or ongoing commissions. But no fees would be akin to buying a treasury bond. Is that true?

  4. Hersh Stern:
    Aug 21, 2015 at 03:26 PM

    Hi James-

    Yes, literally, no upfront or back-end fees. Period.

    So if you invested $100,000 in a SPIA, and if the insurance company’s rate per $1,000 is $5 per month, then your $100,000 premium buys you $500 a month. Nothing is subtracted from that $500 amount. It’s all yours.

    Of course, an insurance company aims to make a profit on the annuities (and other products) it sells.

    How much profit it earns depends on its ability to predict the life expectancies of its policyholders plus its ability to invest safely yet also earn a return that’s greater than its costs.

    Here’s how that works: Say an insurance company earns X% a year on its general portfolio of assets (bonds + mortgages + real estate holdings). It can also calculate a Y% which is the total of all its operating, sales, marketing, finance, investment, administrative, personnel, and other costs, plus its profit margin. Then the difference between X% and Y% is a percentage interest rate the company can credit on its annuities and other lines of business.

    I’ll put some numbers to the above formula so you can more easily visualize it. Assume Company A earns 7% on its investments and calculates its total costs plus a profit margin to equal 4%. Then the company would be crediting 3% (which is 7% minus 4%) in its annuities. There wouldn’t have to be additional fees because those were already included in the total cost calculation.

    Hersh

  5. Fred:
    Jan 15, 2016 at 09:49 AM

    You mentioned TIAA in an earlier answer. I just got immediate annuity quotes from them and was surprised the TIAA quotes were lower than the ones at this web site. Why is that?

  6. Hersh Stern:
    Jan 15, 2016 at 09:50 AM

    Hi Fred-

    I explained (above) that TIAA pays generous salaries to its call center representatives which are not that different than the commissions an insurance agent might earn. So just because TIAA doesn’t have a commissioned sales force it doesn’t mean that TIAA avoids personnel-related costs in its selling operations. As they say, there’s no free lunch :)

    But I believe a much more salient factor is at work here, and it relates to the actuarial assumptions TIAA makes with respect to its life annuity products.

    TIAA has been marketing insurance and annuities to educators and hospital employees for over a century. These policyholders tend to be more highly educated and have a higher healthcare utilization rate than the general population. So over the year TIAA’s actuaries have become accustomed to expecting its policyholders to live longer than the general population. In other words, the TIAA actuaries assume a longer life expectancy, hence, longer payout duration, in its annuity income calculations, than do the other insurance companies. This factor on its own, is enough to cause TIAA annuity quotes to be near the bottom of our list.

    Hersh

  7. Chuck:
    Apr 04, 2016 at 03:44 PM

    In building an annuity ladder, when I re-invest as each annuity expires, is there a resulting repeat commission?

  8. Hersh Stern:
    Apr 04, 2016 at 03:55 PM

    Hi Chuck,

    Yes, each time you purchase a new annuity contract and pay an insurance company a new premium, it will typically pay the agent a commission based on that premium amount.

    If you create an annuity ladder at the end of each contract’s “interest rate guarantee period” you will have the option of either accepting your current company’s new interest rate offer or transferring (exchanging) your contract’s account values to a new company (if, for example, a different company makes a more attractive offer than that proposed by your current company). In both these instances, whether you renew with your existing company or transfer to a new company, the agent will typically earn a commission.

    Hersh