Who Pays Annuity Commissions?
Hey, Stan The Annuity Man here, America's annuity agent, with one of the great questions of all time when it comes to annuities. Who pays annuity commissions? I mean, you're talking about some games being played with this answer out there. I get people calling me all the time and telling me what they've been told about when the question is asked, who pays annuity commissions? Well, you're getting ready to find out the truth about that. So, hang in there with me. I'm going to go into detail on who pays annuity commissions, and I might even surprise you and tell you how much commissions are paid with each product.
Who pays annuity commissions? At the end of the day, the answer in the industry would be that the annuity carriers pay it out of the reserve amounts. It's a hidden commission that you never see, and it's hidden from the consumer. I'll give you an example. If you put $100,000 into an annuity and get your first statement, you will see $100,000 on your statement. So, the question begs, "Did the agent get paid?" Yeah, the agent got paid. There's a commission that's built into the policy that's paid from the reserves. But the patented answer, and the answer that the industry wants us to say, but I'm guessing, having done this for a while and being America's annuity agent and licensed in all 50 states, is that it comes from the company reserves.
But the word gain part of it, which I said in the intro, which I think does apply, is who pays annuity commissions? At the end of the day, you do, right? Even though you don't see it coming out of your money, the industry says it's coming out of the reserve. That's true, but there's a hundred pennies in the dollar. It's got to be coming from somewhere. So, what begs your question is, can I buy an annuity without commissions? Sure. There are no load Variable Annuities that you can buy. I'm not saying they're good or bad. Either way, Variable Annuities were put on the planet in 1955 for tax-deferred growth.
Higher and Lower Commissions
But you can buy 100% liquid, no-load Variable Annuities, and the agent isn't paid a commission. But for the rest of the annuities out there, they do get paid a commission; the agents, Stan The Annuity Man, gets paid a commission. But what you need to realize when it comes to commissions with annuities is that the more complex the product, the higher the commission, the longer the surrender charge, the higher the commission. The reverse is true. The simpler the product, the lower the commission; the shorter the surrender charge time period, the lower the commission. That makes sense, right? So, if you can explain the annuity strategy to a nine-year-old, no offense to nine-year-olds, then the annuity commission will be low. If the product has complex calculations and attachments and riders and this and that, then you can explain it to a nine-year-old; the commissions will be high.
When you ask for a quote from The Annuity Man, I'm not going to say, "Okay, you just asked for a quote. What's the best product that pays me? What's the highest commission that pays me?" No, I don't do that. No one should do that. No agents should do that. No advisor should do that. As an agent or advisor, you should say, "Hey, what's the best contractual solution," regardless of product type, and then shop all carriers for it. That's what I do. The problem in the commission world, as you know, and annuities are no different than any commission world is, unfortunately, commissions drive the train a lot when it comes to recommendations where if an agent's starving out there and they can't pay their bills, they're going to gravitate to a higher commission product.
That doesn't mean it's right because it's certainly not right, but that's just reality. You have to be aware of that and aware of the fact that, like I said previously, complex products, longer surrender charge products, have higher commissions and shorter surrender term products, and simpler products have lower commissions. If you just realize that and understand that you will be better off.
The Annuity Level of Commissions
At the end of the day, the annuity company pays them out of their reserves. You do not see any of it coming from your money, but in semantic word games, you're giving the annuity company money. They're paying commissions to an agent. I guess hypothetically, you are paying the commissions even though you don't see it. I know that's word games, but I wish we were transparent about it as an industry. So, let's be transparent about it with this blog from Stan The Annuity Man. Let's talk about an annuity level of commissions.
Immediate Annuities are very simple products, so that should be a low commission. They depend on the carrier, and they're not all the same. But depending on the carrier, the commissions to the agent one time is 1 to 3%.
Single Premium Immediate Annuities, Deferred Income Annuities, the sister of the Single Premium Immediate Annuity, is a very simplistic product. Transfer of risk, no moving parts, no annual fees, very easy to understand. Nine-year-olds can understand it. So, the commissions are low depending on the carrier. Those commissions will be from 1 to 4% depending on the carrier issuing that Deferred Income Annuity.
The same applies to Qualified Longevity Annuity Contracts, which are Deferred Annuities and Deferred Income Annuities, but Qualified Longevity Annuity Contracts are used inside an IRA. Once again, commissions are 1 to 4% depending on the carrier, the firm, the advisor, and who the agent is working for. I'm giving you a range.
Now, the higher commission products don't mean they're bad, but they're higher commissions. Why? Because of longer surrender charges, they have a lot more complexity. Indexed Annuities and Variable Annuities are the highest commission products out there. Depending on the surrender charge time period and the complexity of the product, you will see an upfront commission anywhere from 5%, maybe up to 9%, as well.
Those are the higher-commission products. That's the reason why when you go to the bad chicken dinner seminar, typically, the agent is only showing Indexed Annuities because those are higher commissions. Once again, it doesn't mean they're bad; they just are the highest commission product because you're locking your money in for a long time, and those products are complex.
But in some situations, Index Annuities fit perfectly when looking for CD-type returns. If you want to attach an Income Rider for future income benefits and you've shopped every carrier on the planet for the highest contractual guarantee, they do work.
And then finally, Multi-Year Guarantee Annuities are Fixed Rate Annuities. Those are very easy to understand, very simple, like CDs. CDs, you understand. Guess what? The commissions are very low on Multi-Year Guarantee Annuities and can be as low as half of 1% up to typically 2%. So again, simplistic low commission, complex high commission. It doesn't mean one's better than the other, but you need to know how those commissions are paid, what levels are paid, and what's being recommended to you to buy the level of those commissions even though they're hidden.
All right, commission story time because I get all these calls all the time. "I bought this product; how much did my agent get paid?" And my question is, "Why wouldn't you ask that beforehand?" If you asked me what the commission is on something that you purchase from The Annuity Man, I will tell you the range of commissions I'm being paid. I have no problem with that. I'm a for-profit dude. That's what I do. I'll stand behind it if it's an appropriate and suitable recommendation. And I've earned the right to make that commission. But I did have a call the other day, and someone said, "I just bought this product. What did this person get paid?" And it was a very complex, long surrender charge Fixed Index Annuity. Once again, I have nothing against Fixed Index Annuities. They're fine, they're CD products. But this surrender charge period was 14 years in length. Now, a side note: many states do not allow that long of a surrender period. Most states cap it at 10, so you can't exceed 10. But there are some states that it's a surrender charge bonanza.
So, this was a 14-year surrender charge, and I said, "Because it's 14 years in length, the surrender charge, it's a double-digit commission that person earned." And this guy went through the roof, but I kind of calmed him down. I'm like, "What? Slow down there, Chester. Tell me what you were trying to solve for contractually." And he told me, and I said, "That's not the perfect product, but it's not horrible." And he was trying to solve for a long-term income down the road. He attached an Income Rider to an Index Annuity, which is fine. My only hope is he would've shopped with all carriers. But he did get a wake-up call because, with the commission that his agent earned, the agent went and bought a car for cash.
You have to be careful out there. In a perfect world, just drawing all this together about commissions and annuities, the world would be a perfect place, and the annuity industry would do themselves a favor if this were possible. It might not be administratively for the annuity firms, but maybe it is. What if, in a perfect world, all annuity commissions were the same regardless of the type of annuity?
For example, my example to the annuity industry. Please give it some thought annuity industry out there watching. What if the Index Annuity, Variable Annuity, Immediate Annuity, and Deferred Income Annuity all pay a 2% commission, which is hidden from the client and paid from the reserves? Why would that matter? I'm going to tell you why it would matter.
What would happen if all the commissions were level with different product types? Agents would then be forced to recommend the right product type and solution for your specific situation. Why? Because they're going to get paid the same. That would solve it. Again, Stan The Annuity Man should be the annuities are for the annuity industry.
That's about enough about commission. I will tell you how to get the annuity owner manuals I wrote just for you. Go to this link and download all 6 of my books for free! 6 owner manuals on all things annuity. While you're there, you can also educate yourself in unique quotes by visiting our proprietary annuity calculators. Thank you for joining me today, and I will see you on the next Annuity Man blog.
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