How Insurance and Annuity Compensation Works
Compensation for insurance and annuity products is complex and has evolved over the years. Broadly speaking, there are two main ways an advisor can receive compensation from these products.
Commission
This is the predominant model and has existed for many years. Essentially, commissions are a percentage of the premium paid into the product.
For example, if a product has a 2% commission and you put in $250,000, the commission will be $5,000.
Commission rates vary significantly by product. Some products have lower commission rates than others.
Commissions can also be paid by one of two parties: the client or the insurance company.
When a commission is paid by the client, the commission comes directly from the amount invested. In the example above, $250,000 would go in, but $5,000 would be paid to the advisor and $245,000 would actually be invested. This would generally apply only to investment-related products, not products like term life insurance without cash value.
When a commission is paid by the insurance company, the client does not pay the commission directly. Meaning, if $250,000 goes in, then $250,000 is invested.
Commissions can take many forms including upfront, renewal, trailing, and more.
Commissions are also typically the same regardless of where you get the product. It will pay the same amount whether you obtain the product directly from the company, from an independent agent, a brokerage firm, or one of those TV commercial online websites.
Fee-Only or No-Commission
A newer approach is the development of fee-only or no-commission products. This means that when the product is funded, no commission is paid.
How does the advisor get paid in that situation?
Since the contract does not pay a commission, these contracts may allow the advisor to charge an advisory fee from the contract. This works similarly to a managed investment account, where fees are typically billed against the account being managed.
It is important to note that the most common place to see fee-only or no-commission products is in the annuity space. Other products that do not have cash value, such as disability insurance or term life insurance, are still typically commissionable products.
Which is Better?
Here is where it gets interesting.
One might think — as I did — that a product without a commission would easily provide higher benefits. After all, in the example above, the company is not paying a $5,000 commission. Couldn’t that amount be used to increase the benefit to the owner of the product?
While that makes sense, it’s not always the case.
Some commission-based products may actually offer better benefits than similar no-commission products. The details matter. You have to look at the full product, including the costs, benefits, guarantees, restrictions, and how it fits the client’s plan.
For example, a no-commission annuity may look better at first because it may offer stronger benefits. But if the advisor charges a separate fee for managing or advising on that annuity, a similar annuity with a built-in commission may sometimes provide a better overall result for the client.