Do Annuities Really Have "High" Commissions? by Scott Stolz, CFP, RICP (week 58)

 

In order to help generate ideas for this blog, I read a lot of articles on retirement planning and annuities in general.  It seems that every article I read on annuities mentions “high commissions” as a reason people should be wary of annuities. 

 

As an example, a July 21, 2026 article in Rethinking65 entitled “The Behavioral Errors Ruining Retirement” (The Behavorial Errors Ruining Retirement, Financial Planning Articles for Financial Advisors & Wealth Managers), says annuities “…are a prime example of conflicted advice, in which customers are sold a product attached to an often-large commission.”  Before I delve further into this issue, I want to first say that I really liked this article.  It was a great summary of the emotional challenges many retirees face when trying to spend in retirement.  Without knowing how long they will live and what their actual expenses might be – especially health care expenses – many retirees end up restricting their retirement spending and therefore end up dying with more money than they had when they entered retirement.  This is especially true if that retiree is a saver by nature.

I have suggested in numerous blogs that using annuities to create a retirement paycheck is a solution to this emotional struggle.  Most retirees are far more comfortable spending money that is automatically deposited into their checking account than money that has to be withdrawn for an investment account.  The former feels like spending money just like you did while you were working.  Because the later results in a lower account value, it often feels like you are losing money.  But should annuities be rejected as an alternative because of the “often-large commission”?  For that matter, are the commissions “often-large” at all?

There are five basic types of annuities.  Here is the typical commission ranges for each of them:

             

Annuity Type	Typical Commission Range
Fixed Annuity/MYGA	3-6%
Fixed Indexed Annuity (FIA)	5-7%
Registered Indexed Linked Annuity (RILA)	6-8%
Variable Annuity	7%
Immediate Annuity/Deferred Inc. Annuity	4-6%

 

To be sure, there are some annuities that have commissions higher than these ranges – sometimes as high as 10%.  These annuities are sold primarily by independent insurance agents that have little, if any, home office oversight.  If you purchase an annuity from a bank or major securities firm, you will rarely find annuities with commissions beyond the ranges listed above.  Securities regulators expect these firms to minimize and manage any conflicts of interest on any product they sell.  There is no conflict of interest greater than offering products with high commissions.  Therefore, in order to stay out of the cross hairs of the regulators, no bank or securities firm will want to offer annuities that pay a commission beyond the norm.

The question therefore is, are these commission ranges high?  No one should buy an annuity unless they intend to own it at least through the surrender charge period (the number of years where you will pay a charge to get out of the annuity).  This is typically 5-10 years.  If you line that time frame up with the commissions above, you get to a commission cost of about  1% per year.  This is very much in line with the typical annual advisory fee that most financial advisors charge to manage money.  Now some will say that once the annuity is sold, there is little, if any work, to manage that annuity.  Therefore, how is the 1% per year justified?  However, that’s not an issue that is unique to annuities.  For example, under that premise, how would an advisor justify assessing an annual advisory fee on an individual bond?  In addition, the annuity commission is not ongoing.  If I end up owning the annuity for 15 years, my annual cost is closer to 0.5%, whereas an advisory fee is perpetual.

The annuity advocates would also likely point out that the annuity commission is not deducted from the investment.  If you deposit $100,000, the full $100,000 will be subject to interest and/or earnings.  The commission is paid by the insurance company out of its own pocket and then recovered over the life of the annuity out of the profit margins on the product.  While this is true, the annuity owner still pays for it through lower returns.  For example, if there was no commission on a fixed annuity, the insurance company could likely pay an additional 0.5-1% per year in interest.  Just because the annuity owner doesn’t see the annual cost of the commission, doesn’t mean there is no such cost.

If you are considering adding an annuity as part of your retirement income plan, let me offer you a few suggestions to help you decide if the commission is indeed too high. 

1.      Ask the agent or advisor directly, “how much commission is being paid to you on this annuity?”  Then ask yourself if that seems reasonable.  If you’re not given a direct answer, you might want to consider another advisor.

2.      Pay special note to the size and length of the surrender charge.  This cost exists primarily to allow the insurance company to recoup the costs of issuing the policy should you get out of the annuity early.  The commission is the insurance company’s biggest cost.  Therefore, the larger and longer the surrender charge, the higher the commission.  If you subtract 1% from the first-year surrender charge percentage, you will have a good estimate of the commission that is being paid.  For example, if the surrender charge at the outset is 8%, you can assume the commission is about 7%.

3.      How long do you expect to own the annuity?  The longer the time period, the less the total cost of the commission.

The fact of the matter is that the annuity industry has evolved to the point that as long as you avoid the relatively small percentage of the annuities that have commissions beyond the norm, the cost to buying an annuity is not that different than the costs assessed by the firms that “do better when you do better.”