Understanding Annuity Sales Fees and Commissions

As confusing as certain types of annuities can be (looking at you, variable annuities), perhaps nothing frustrates annuity buyers more than annuity fees and agent commissions.

Insurance companies aren’t always upfront about an annuity’s price. You often have to dig through your contract or prospectus, and, if you’re not careful, you can easily lock into an annuity contract with unexpected fees. But truthfully—annuity fees shouldn’t be complicated.

To help you figure out what you can expect to pay, we're breaking down the most common annuity fees and commission options.

What Are Annuity Fees?

Annuity fees reflect the real cost of owning an annuity.

They may be stated directly in your contract or built into your crediting rate. For example, the lower the fees, the higher your rate tends to be. Annuity fees are typically proportionate to an annuity's risk level or benefit options. In other words, annuities with low risk have lower fees, and annuities with high risk have higher fees. In the same way, annuities with no additional benefits or riders may have lower fees and annuities with more bells and whistles may have higher fees.

Often, the type of annuity determines which fees you’ll pay (more on that below). However, there are some annuity fees to be aware of, regardless of the annuity type. The following are some of the most common annuity fees.

1. Administrative Fees

Administrative fees, or annual fees, are fees for various low-maintenance services, such as bookkeeping, issuing statement of annuities, or managing your account. Administrative fees are typically low (around .3% of your annuity value). Occasionally, insurance companies may waive these fees on variable annuities if your account is above a specific value.

2. Surrender Charges

Most, but not all, annuities come with surrender charge periods. If you withdraw money during this period, you must pay a fee (the surrender charge). The surrender charge is written in your contract, and it’s usually 2% – 10% of the withdrawal amount.

When you withdraw money during the surrender charge period, your insurance company multiplies the surrender charge by the withdrawal amount. Then, they deduct that sum from your total withdrawal.

For example, if you withdraw $2,000 in your contract's first year and the surrender charge for the first year is 5%, you will pay a surrender charge of $100 and your net withdrawal will be $1,900.

Surrender charges can be a hassle, but there’s some good news: you may have some leeway.

Many insurance companies allow you to take penalty-free withdrawals of 10% or less of your annuity’s value each year. And, for qualifying medical conditions, you may be able to cash out your entire annuity. On top of that, surrender charges tend to fall by one percent each year.

So, if your surrender charge is 5% the first year, it will probably be 4% the year after.

3. Rider Fees

An annuity rider is an “extra” benefit that you can add to your annuity contract. Riders mitigate specific risks, such as inflation or losing too much money in investments.

Rider costs vary, usually from .25% to 1% (though they can be higher than that), and they’re deducted, monthly or annually, from your account value.

4. Investment Fees

With variable annuities, you invest your premiums in subaccounts (similar to mutual funds), and you pay investment fees. These fees can be pretty high, sometimes as high as 3%, and you pay them every year.

5. Mortality and Expense Fees

Other fees often associated with variable annuities are mortality and expense fees. These fees protect insurance companies from losing money on certain guaranteed living benefits, such as death benefits or guaranteed income for life. For example, let’s say you bought a $100,000 deferred annuity with a death benefit and a guaranteed income rider.

In this scenario, you and your beneficiary are guaranteed $100,000. Under normal circumstances, the insurance company expects you to pay $100,000 in premiums. But if you die before you finish paying your premiums, the insurance company still has to pay your beneficiary $100,000, no matter how much (or how little) you paid to them.

The mortality and expense charge helps to offset the cost to the insurer of any guarantees that might be included with the annuity contract.

What Are Agent Commissions?

When an agent sells an annuity product, they receive a proportionate amount of the sale, called their “commission.”

Insurance companies pay annuity commissions directly, so you don’t have to worry about them coming out of your annuity account. But, like annuity fees, annuity commissions are often built into your interest rate.

So, even if you’re not paying an agent directly, their commission still affects your annuity’s rate of return. The only way to get around paying an agent fee is by not working with an agent. Some companies, like Canvas Annuity, offer online annuities that don't require an annuity agent.

But, if you work with an annuity agent, they always get paid. They may tell you they don’t earn an annuity commission. They may say there’s no additional charge to you. But it’s only semantics.

No one works for free. Usually, an annuity agent receives payment in one of three ways:

1. Upfront Commissions

With upfront commissions, annuity agents receive a one-time sum that’s a percentage of the annuity sale. For example, if your agent has a 5% upfront commission and you buy a $100,000 annuity, your agent would get one payment of $5,000.

2. Trailing Commissions

Trailing commissions means your annuity agent earns a percentage of the annuity value every year of your contract. Typically, trailing commissions include an upfront fee, though it’s usually a lower commission. For example, let’s say you buy a 10-year $100,000 annuity.

And your agent gets an upfront commission of 2% and a trailing commission of 1%. That means the insurance agent will pocket $2,000 immediately and another 1% of your account value for the next ten years.

3. Fee-Only Commissions

A fee-based commission works similarly to a trailing commission, except there’s no upfront fee. Instead, your annuity agent earns a percentage of your account value every year. But here’s the catch: In this commission option, you pay the annuity compensation, not your insurance company.

Why must you pay? Well, agents who charge fee-based commissions aren’t usually salespeople. They’re technically not even agents.

Often they’re financial professionals (like a financial advisor or financial planner). So, in addition to getting an annuity, you’re also getting some financial advice, whether that’s helping you choose the right annuity product or helping your annuity work with other financial products (like a 401(k), IRA, or even mutual funds).

Fee-based commissions range from 1% – 3% of your account value, and you pay them quarterly, semi-annually, or annually.

Can High Commissions Motivate Agents to Sell Expensive Annuities?

In the past, the high commissions on variable and indexed annuities motivated annuity agents to sell them, even if they weren’t the best annuity product for their clients. But in 2020, the National Association of Insurance Commissioners (NAIC) passed a new regulation requiring agents and insurers to recommend annuities and other financial products that are in the best interest of their clients.

So now, if an agent or insurer puts their financial interests before consumers, they could be stripped of their license. As a result of this regulation, insurers often have specific suitability rules that must be met before an annuity contract can be processed.

How Do Fees and Commissions Work By Type of Annuity?

Annuity fees vary drastically depending on the type of annuity you buy.

A general rule to keep in mind: The more complicated the annuity, the more you’ll pay in fees and commissions. Let’s see what that looks like by breaking down the fees on five common annuity products.

1. Multi-Year Guaranteed Annuity (MYGA)

A multi-year guaranteed annuity (MYGA) takes the lead as the most straight-forward annuity product out there. Like a certificate of deposit (CD), you pay a lump sum to an insurance company and let it sit for a certain period of time.

In exchange, your insurance company guarantees you a fixed crediting rate, which your annuity earns every year. Once your contract is up, you get your payouts (premium plus earnings), either in a lump sum or a series of payments. Because of this simplicity, MYGAs have lower commissions (usually 1% – 3%) and no annual fees. Like other deferred annuities, MYGAs have a surrender period.

However, you can usually withdraw 10% of your account value penalty-free every year. Some annuity providers, like Canvas Annuity, sell MYGAs directly online.

By bypassing commissioned agents, they help you secure an even higher interest rate.

2. Single-Premium Immediate Annuity (SPIA)

A single-premium immediate annuity is an income annuity that pays out right away (or within one year after your purchase). SPIAs have low annual fees, and the agent commissions typically range from 1% – 5%. Though the longer your SPIA contract, the more commission your agent makes.

One thing to keep in mind: SPIAs don’t have surrender periods. So, once you hand your money over, you can no longer cash it out, even for a penalty.

3. Deferred Income Annuity (DIA)

The deferred income annuity (or longevity annuity) is the opposite of a SPIA. Instead of getting income immediately, you pick an accumulation period ( the length of time your money will grow with interest). Then, once the accumulation period is over, you choose a payout option, which can be a lump sum, systematic withdrawals, or periodic payouts. Like SPIAs, DIAs have low annual fees and lower commissions, usually around 2% – 4%.

Though some DIAs come with a surrender period, most don't, which means you won’t be able to access your money until the accumulation period ends.

4. Fixed Indexed Annuity (FIA)

A fixed indexed annuity (FIA) ties your premiums to the changes in an index, such as the S&P 500.

Your crediting rate will be determined by the performance (whether good or bad) of the index. If the index does poorly, you may not earn anything. Here’s the thing—FIAs can be complex.

In fact, we’re barely scratching the surface of their complexity. That’s why FIA commissions are high, often as high as 9% – 10%. And, in addition to annual fees, you may end up spending money on annuity riders, which provide enhanced death benefits or higher earnings.

5. Variable Annuities (VA)

Variable annuities are basically mutual funds wrapped in a foil of insurance. You invest your premiums in investment accounts (called subaccounts), and your rate of return depends on the performance of these accounts. Variable annuities are by far the most complex and expensive annuity products out there.

First off, expect to pay management fees on all your subaccounts (usually from .25% – 3%) in addition to the administrative fees due on your variable annuity.

On top of that, if you buy guaranteed living benefits (aka riders), you’ll pay annual fees on those, too. And because these riders present specific risks to the insurance company, they’ll charge you a mortality and expense fee to balance it out.

Agent commissions on variable annuities are also high, usually around 4% – 9%. Before you buy a variable annuity, consider consulting a financial advisor who can help you understand the risks.

How Can You Avoid Expensive Annuities?

Remember, an annuity is an insurance product that can help you generate lifetime income. They're not designed to bog you down with fees. To buy an annuity with no surprises, here’s what you can do.

1. Understand How Annuities Work

Look, we get it—not all annuities are simple. But, at the very least, always do the hard work and understand how your annuity works.

2. Dig Into Your Annuity Contract’s Details

Your annuity provider should give you information that breaks down the nuts and bolts of your annuity, including fees and commissions. Even if it puts you to sleep, do your research.

Read the fine print (and the fine print on the fine print). If something doesn’t make sense, ask an agent, a financial advisor or a trusted friend for help. As for commissions, you can always ask your insurance company for a commission schedule, which will tell you how much an agent earns from annuity sales.

3. Hire a Financial Professional

For complicated annuities, such as fixed index and variable annuities, it might be best to get some help.

We suggest hiring a financial professional who is legally required to serve you in your best interest.

Want an Annuity with No Commissions or Hidden Fees?

Buying an annuity through an agent can feel like buying a car through a greasy salesperson: You go in looking for a cost-efficient (retirement) vehicle, and, to your surprise, you come out with the newest, luxury sport utility vehicle.

At Canvas, we believe buying an annuity doesn’t have to be this way. That's why we take the commissioned agent out of the equation, allowing you to buy an annuity directly online.

Yes. You read that right: directly and online. No agents means we don’t pay commissions, which, in the end, means more money for you.

Our annuities are 3, 5, and 7-year MYGAs. You fund them with a single premium using qualified (before-tax dollars) or non-qualified (after-tax dollars) funds.

Our interest rates are some of the highest you’ll find for similar annuity products or similar bank products, like a CD. And with no annual fees, you can feel confident you’re buying a clean annuity, and not a fee-loaded mess.

Check out our simple annuities, and let’s make your money work harder for you.