When it comes to annuities, there’s a common misconception among consumers that the commissions paid to agents or advisors somehow come out of their own pocket. Many fear that these commissions will be deducted from their principal, interest, or income streams. However, this fear is not only misplaced, it also prevents retirees from fully understanding the true value of annuities as a retirement tool. Let’s clear up the confusion around annuity commissions and why there’s no reason to worry.

 

1. Annuity Commissions Are Paid by the Annuity Company—Not You
 

First and foremost, it’s important to understand that annuity commissions are paid directly by the insurance company, not the consumer. When you purchase an annuity, the insurance company compensates the agent or advisor who sells the product. This is similar to how a car dealership pays the salesperson’s commission when you buy a vehicle, or how a bank compensates a financial advisor for selling one of their products.
 

In contrast, commissions for things like real estate transactions or mortgages typically come out of the buyer’s proceeds or assets. This is why it’s easy to see why people might think annuity commissions work the same way—but they don’t.

 

2. Commissions Are Not Deducted from Your Principal or Income
 

Here’s where the real misunderstanding happens: commissions are never deducted from your initial investment, principal, or ongoing income. Let’s break it down:
 

• Principal Remains Intact: The amount you initially invest in an annuity is untouched by the commission. If you invest $100,000 in an annuity, you will still have access to that full $100,000 as part of your contract. The commission is not subtracted from the amount you deposit into the annuity.
   

• Growth and Interest Are Unaffected: Any interest or growth that accumulates within the annuity is not diminished by the commission paid to the agent. For example, if your annuity grows by 5% over the first year, you will receive the full benefit of that growth. The commission doesn’t take a cut of the interest you earn.
   

• Income Streams Are Not Impacted: Likewise, your guaranteed income stream (whether immediate or in the future) is not reduced by the commission. If you’ve selected an annuity that promises to pay $3,000 per month, you will receive the full $3,000 regardless of what the agent’s commission is. This is because the commission is a separate cost that the insurance company assumes, not something that comes out of your income.
  
   

3. The Commission Is Part of the Cost of the Product—Just Like Marketing and Overhead
 

To put things in perspective, think of the commission as one part of the cost structure of the annuity, similar to how any other business has operational costs, such as marketing, overhead, or customer support. For an annuity company to sell and distribute their product, they must compensate the professionals involved in the sales process. This compensation is typically a small percentage of the annuity value (often ranging from 1% to 7%, depending on the type of annuity and the structure of the deal).
 

The important thing is that these costs are built into the price of the annuity by the insurance company. They are not passed along directly to the consumer in a way that reduces their investment or income. The commission is simply how the agent is compensated for their role in helping you choose and understand the annuity product.

 

4. Annuities Are Not Like Real Estate Commissions
 

To help put things in perspective, it’s useful to contrast annuity commissions with commissions in industries like real estate. In a real estate transaction, the commission is typically deducted from the sale price of the property, reducing the proceeds the seller receives. In other words, the seller pays the real estate agent’s commission out of the proceeds of the sale, which can be a significant percentage of the home’s value.
 

This is not how annuity commissions work. Unlike real estate commissions, where the fees are taken directly from the sale proceeds, annuity commissions are not deducted from your investment or future payouts. The price you pay for the annuity is the same, regardless of the commission.

 

5. Why Are Commissions a Normal Part of the Process?
 

Like any financial product, annuities require professionals to help educate you, explain the features, and guide you through the process of selecting the right product for your needs. These professionals—whether they are agents, advisors, or financial planners—are compensated for their time, expertise, and service. Without this compensation structure, many retirees would be left navigating a complex product without proper guidance.
 

Additionally, the presence of commissions can actually benefit consumers in some ways. For example:
 

• No Upfront Fees: Most annuities do not charge an upfront fee for purchasing the product. The commission is part of the internal costs built into the annuity, so you don’t have to pay any out-of-pocket expenses to purchase the product. This can be an advantage for those who want to avoid upfront charges.
   

• Incentive for Professional Service: The commission structure can provide an incentive for agents to offer thorough advice and support during the purchasing process. You are paying for the value of their expertise, and because they are compensated for their efforts, they are incentivized to ensure that you understand the product fully and are selecting the best option for your retirement goals.
  
   

6. No Need for Fear—Annuities Can Be a Powerful Retirement Tool
 

Annuities often get a bad rap due to misunderstandings about their cost structure and the role of commissions. However, it’s essential to remember that annuities are powerful retirement tools designed to provide guaranteed income for life, protect principal, and hedge against longevity risk. The commission paid to agents is part of the process, but it should never be the reason for fear or hesitation.
 

In fact, annuities are specifically designed to ensure that your retirement income needs are met without you having to worry about market fluctuations, longevity risk, or running out of money. The cost of an annuity (including the commission) is simply the price of having that financial security.


7. But Can I Really Even Trust A Commission Based Advisor To Act In My Best Interest?
 

Yes, absolutely!  But…

 

First, they must be able to clearly prove themselves to be a person of integrity.  

 

And second, you need to feel comfortable that they are truly looking out for your best interests by providing you with a solution and not just selling you a product.  

 

“Yeah, but how will I know if they are or not?” 

 

Don’t worry; we are going to give you some very helpful tips on how to make that determination in the next two sections.

 

In the meantime, try to remember one thing: Whether someone gets paid on commission or on salary, they’re either an honest person or they’re not.  Here is what we mean.  Most real estate agents work on commission, and most will genuinely work hard to find their clients’ “dream house.”  On the other hand, you can find countless examples in the corporate world of dishonesty and corruption by salaried people.

 

Have you ever heard that it is better to work with a fee-based financial planner who bills by the hour for non-biased advice because they have no motivation to sell you financial products?

 

Have you also heard that a number of fee-based planners come under fire because they produce massive, phone-book sized financial plans that are packed full of overly-complex and outright unnecessary graphs and charts just so they can rack up extra billable hours?  

 

See the point?  Either someone’s honest or they’re not.

 

So again, the bottom line is: whether you are dealing with fee-based, commission based, or salary-based agents/advisors, we recommend that you spend your time focusing on and interviewing the individual character of the person you are dealing with more than their compensation model.

 

So what types of signs do you look for?  Read on...


8. How To Spot A Commission-Hungry Annuity Agent
 

As we mentioned earlier, there are honest people and dishonest people, and there are good and bad annuity agents.  Here are some valuable tips and warning signs you can use to determine which kind of agent you’re interviewing.

 

• Red Flag #1 – Are They A “Captive Agent?”
  
  Captive agents only work for one insurance company and typically receive a lot of pressure when it comes to production and quotas.  This does not guarantee that an advisor is unethical, but it can make it much more difficult for an annuity advisor to give unbiased advice when they are limited to selling one company’s products. 
  
  In contrast, an independent advisor typically brokers with numerous annuity companies and therefore has no quotas.  Also, an independent advisor has much more flexibility when it comes to hand picking the perfect product for your exact needs.  So always ask, “Are you captive or independent?”
   

• Red Flag #2 – Do They Overly “Favor” One Or Two Main Annuity Products?
  
  A truly ethical annuity agent will sell based on his clients’ needs - not on his own commissions.  Even though most independent agents have access to multiple companies and products, it is important to cross-examine them to make sure they don’t oversell a certain type of annuity (just because it happens to pay the best commission or offer additional production incentives).  
  
  Always ask what factors influence their decision to recommend a certain annuity over another and whether or not that recommendation changes for different clients and why…you get the picture.
   

• Red Flag #3 – Product Pitching vs. Understanding Your Needs
  
  This is pretty closely related to the one above with one extra point: Does your agent spend the majority of the time talking about a specific “fantastic” product or do they spend the time asking you genuine questions about what your real needs are?  
  
  One of the most telling signs that you are interviewing a commission hungry agent is that they are more concerned about getting you excited about THEIR annuity product than focusing on why it’s right for YOU!
  
  Trust your gut with this one. Ethical annuity agents do more listening than talking!

9. Identifying Ethical Annuity Agents & Advisors

So how do you know when you’ve truly found a good agent? 

 

How do you know that you are about to purchase an annuity product or strategy that is going to provide you with years of security, peace of mind, and solutions that you will be happy with?

 

These simple tests can go a long way in helping you make the best decision about the annuity advisor you’re working with.

 

• Test #1 – They Are More Interested In You Than In Themselves.
  
  A good, ethical annuity agent will want to provide lasting solutions to their clients’ most pressing needs.  An honest agent will take the time to sit and talk with you, ask questions, listen, find out what’s important to you, and work together with you to find a solution to your needs.  An honest agent is always more interested in solutions, rather than products.
   

• Test #2 – THEY are willing to be the one to say “No” and try to force a product sale. 
  
  An honest annuity agent will be willing to tell a client “No, I don’t think that what I have is the best fit for your needs” instead of trying to force a sale like a commission-hungry agent would.
   

• Test #3 – They are willing to provide you with references
  
  A commission-hungry or dishonest annuity agent will probably leave a trail of less-than-satisfied customers behind him and will therefore be hesitant to put you in touch with his client base.  An ethical agent, on the other hand, will be more than happy to provide you with the testimonials or references of clients who found genuine value in the work he provided.  This is a great test to draw the line in the sand!

 

Conclusion: Understanding Commissions is Key to Making an Informed Decision
 

Rather than being afraid of annuity commissions, consumers should focus on understanding how annuities fit into their overall retirement strategy and the benefits they provide. Commissions are just one part of the cost structure of an annuity and do not come at the expense of your principal, interest, or income.
 

If you have concerns about commissions or annuities in general, consider scheduling a no-obligation consultation with a qualified financial advisor who can walk you through the specifics. Understanding how annuities work and how commissions fit into the bigger picture will help you make more informed, confident decisions about your financial future.