The majority of annuity agents operating in the United States make their money from commissions. This means that when they sell an annuity product to a new client, the annuity company whose product was used will pay them a percentage-based fee of whatever the principal amount was that the client invested.

Most commission percentages vary by product and company. A typical fixed annuity will pay a commission of anywhere from 2-5%, which would net the agent somewhere around a $2,000 - $5,000 commission for every $100,000 of principal that a client would invest. Other types of annuities, such as variable or equity-indexed annuities, may pay a higher commission up front (sometimes upwards of 6-9%) or they will pay a small “trail” commission for every year that the client’s account stays “on the books.”

For many consumers, this sounds like the agent is getting too good of a deal up-front. However, it is important for the consumer to keep in mind that while an annuity agent appears to get paid more up front than, say, a mutual fund advisor might, this up front commission is usually the only money the agent makes throughout the entire life of the contract - even though they may continue to provide ongoing service to their clients’ accounts for up to 10 years or more.

Here is a quick example. Let’s say that an annuity agent is helping his client open a 10 year fixed annuity account for $100,000, and that his commission is 5%. That means that his commission is $5,000 up front, but it is also the total amount of compensation he will receive for managing this account and providing service for his client for the next 10 years. At the same time, let’s say a mutual fund advisor is also opening an account for her client with an identical $100,000 of investment principal. The mutual fund advisor is paid a 0.75% fee up-front, but also continues to charge a 0.75% asset fee every year for the next 10 years.

At the end of 10 years, who has made more money – the annuity agent or the mutual fund manager? Let’s see. The annuity agent made $5,000 one time up front. The mutual fund manager made 0.75% every year for 10 years, which comes out to $7,500. That’s 50% more commission than the annuity advisor - and that doesn’t even count the fact that as the mutual fund grows, the .75% earned is on a higher balance every year!

Lastly, keep in mind that if you invest your money with a fixed or fixed-indexed annuity, 100% of your principal goes to work for you from day one, and the agent is paid a commission out of the annuity company’s pocket – not yours. In contrast, if we go back to the mutual fund example with the 0.75% fee, it would mean that once you invest your $100,000 – your opening balance is $99,250 after the fee AND that 0.75% comes directly out of your earnings every year for the next 10 years.

So the bottom line is that instead of worrying about whether the annuity agent you are considering working with is getting paid a commission or not, it would be better for you to shift your focus onto the key points that we are going to outline in the rest of this lesson.