Answers · Annuities

Why are financial advisors pushing annuities?

Usually because of how they are paid. Most people selling annuities are licensed insurance agents earning a one time commission from the insurance company, and that commission is generally larger on contracts that lock your money up longer. There is also a real reason: turning savings into income you cannot outlive is a genuine problem. Both are true at once.

The word advisor covers two very different jobs.

Advisor is not a protected title the way most people assume. The person across the table could be paid in one of two ways, and the two produce opposite biases about annuities.

A fee only adviser is paid by you, usually as a percentage of the money they manage. Move 300,000 out of the accounts they bill on and into an annuity, and their revenue drops. Some of the loudest opposition to annuities comes from that seat, and it is rarely disclosed as an incentive either.

A licensed insurance agent is paid by the insurance company when the contract is issued, usually as a one time payment. Plenty of people hold both licenses and can be paid either way depending on what they sell you.

So the useful question is never whether someone has an incentive. Everybody does. It is which direction theirs points, and whether they will say so without being cornered. To be clear about this page: opfinances.com is a licensed insurance agency, not a financial advisor and not a fiduciary, and commission is how it gets paid.

The commission does not come out of your deposit, and that is the part people get wrong.

Put 100,000 into a typical fixed or indexed annuity and your statement generally shows 100,000. Nothing is taken off the top the way it was with an old front loaded mutual fund, so people who go looking for the deduction do not find one.

It is still not free. The insurance company pays the agent out of its own margin, then recovers it over the life of the contract. It does that through the surrender charge schedule, the cap or participation rate on an indexed contract, or the annual charges on a variable one.

So the cost is real, but it is spread into the terms rather than printed as a line item. What the agent was paid and what the contract costs you to own are two separate questions. The second decides whether this was a good purchase.

The payment is generally biggest on the contracts that lock your money up longest.

This is the actual mechanism behind the word pushing. Commission tends to scale with the length of the surrender period. A contract with a three year surrender charge pays a fraction of what a ten year contract pays on the same deposit.

None of that is hidden or improper, and the logic is not unreasonable. A longer commitment lets the insurance company invest further out, which can support a better rate. But it means the incentive and your flexibility pull in opposite directions, and you should not have to guess which one shaped what you were shown.

The version worth watching closely is a replacement. Moving an existing annuity into a new one restarts the surrender clock and generates a fresh commission. Sometimes that genuinely helps the owner. It is also the most abused transaction in this business, which is why California requires replacement disclosure forms comparing the old contract against the new one. Those forms are there to be read, not initialed.

There is a real reason underneath the commission, and ignoring it is its own mistake.

Turning a pile of savings into income that lasts is hard, and it is a different problem from building the pile. You do not know how long you will live, and a bad run of market years early in retirement does far more damage than the same run ten years later.

Annuities are one of the few instruments built for that problem. Pensions used to do the job and mostly do not anymore. Any guarantee inside an annuity depends on the claims paying ability of the insurance company issuing it, which is why the carrier's financial strength rating belongs in the decision rather than a footnote.

Interest rates moved too. Contracts written in the last few years pay materially more than those from the 2010s, so a category that earned skepticism then reads differently now. More people selling annuities is not by itself evidence of a scam. Part of it is a large generation retiring just as the product finally priced reasonably.

Both things are true at once. The commission is real and the problem is real. A recommendation only becomes suspect when the first one is doing all the work.

How to tell a recommendation from a pitch.

The difference shows up early. Someone doing this properly asks what you already own before naming anything. They want to know what your income looks like without this contract, how much of your savings stays liquid, and what the money is for.

California requires an agent to have reasonable grounds for believing an annuity suits your situation, and to document it. That paperwork exists. You can ask to see the suitability form and read what was written about you. Agents also have to complete annuity specific training before selling one, and asking about it is fair.

Then watch the small things. They name the surrender period before you ask. They put the annual cost in dollars in writing. They can describe a situation in which this would be the wrong move for you. They compare at least two structures, including a simpler and cheaper one, and explain why the pricier one wins.

The warning signs are just as plain. A product name in the first meeting, before anyone has asked what you already own. Urgency about a rate that expires Friday. Any reluctance to discuss how they are paid. If you are 60 or older, California gives you 30 days after delivery to cancel an annuity and get your money back. Refund rules differ between fixed and variable contracts, so ask which applies before you sign.

Related

Do annuity commissions come out of my deposit?

Generally not in a way you can see. Put in 100,000 and a typical fixed or indexed contract credits 100,000. The insurance company pays the agent from its own margin and recovers it over the life of the contract through the surrender charge schedule, the cap or participation rate, or the annual charges. The cost is real, it is just spread out instead of deducted up front.

How much commission does an agent make on an annuity?

It varies widely by contract type, and it moves with the length of the surrender period. Short, simple contracts pay the least. Long ones with income riders pay the most on the same deposit. Rather than trusting any published range, ask the person in front of you for the figure in dollars on the specific contract being recommended. That is an easy answer to give when the recommendation is sound.

Why do some advisers say never buy an annuity?

Often for the mirror image reason. An adviser paid a percentage of the assets they manage loses revenue when money leaves those accounts for an annuity. That is a real incentive pointing the other way, and it gets disclosed even less often than commission does. A blanket never is about as useful as a blanket always.

Is it a bad sign if my agent earns a commission?

No. It is how insurance has always been distributed and it says nothing on its own. What matters is whether they will tell you the number, whether the contract fits what you actually need, and whether they can name the circumstances in which they would tell you not to buy it. Refusing to discuss compensation is the warning sign, not the compensation itself.

Where this fits.

This question sits inside a bigger one. Annuities walks through the whole decision rather than this one piece of it.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.

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