Annuities Without Commissions

Annuities Without Commissions

At its most basic, an annuity is a contract where you give an insurance company a sum of money and they promise to pay you an income stream for a specific period of time, often your entire life.  There are tons of flavors however.  This article is not intended to discuss all the various types of annuities and the associated riders and options within the various types.

This article also will not help you determine if an annuity is right for you.  This article will make you aware of annuities out there that do not pay commissions if you ultimately determine that an annuity is right for you.

Traditional Sales Model

Annuities have typically been sold by insurance-licensed salespeople. In fact, this is still the most common way people buy annuities. Under this model, the agent usually earns a commission of around 5-10% on the amount you put in depending on the type of annuity.  Because of this up-front charge, there is usually a surrender period in which you would pay a penalty if you left the annuity contract.  This penalty allows the insurance company to recoup the commission they paid to the agent.

There are also ongoing fees in an annuity.  All annuities have some cost, which the industry calls Mortality and Expense (M&E).  In addition to M&E, there can be costs for additional riders, administrative costs and underlying fund costs. Unfortunately there are also other complex costs like cap rates, participation rates and spreads.  These don’t show up the same way as other costs but are costs nonetheless.

No-Load Annuities

More and more companies are offering annuities that do not pay a commission to an agent. A lot of people haven’t heard of them because they are newer and the annuity agents have a strong economic incentive to not tell you about them.  

There can be a few benefits to these policies.  The first is that there is usually no surrender period because no up-front commission was paid to a salesperson. This means you can change your mind without penalty.  Although not always the case, the ongoing fees on these policies can also be lower and/or have more favorable terms.

Already Have an Annuity?

Should you go ahead and switch to these newer annuities if you already own an annuity?  Not so fast!  You may still be in a surrender period, which means you could owe a hefty fee if you leave the contract.

Also, some older annuities have benefits that do not exist anymore, such as the ability to take income from a rider without decreasing your account value.  

Other times the income rider could be at a point where it can provide more income than other alternatives.  You could be harming your finances by getting out of these types of situations.  

Like most things in personal finance, the correct course of action depends on your specific and unique circumstances. A Fee-Only advisor that doesn’t have a commission conflict and has a legal obligation to work as a Fiduciary at all times can help you make this decision.

Tax Implications of Switching

Let’s imagine that you already own an annuity and have decided you’re going to get rid of it.  Your tax consequences depend on the type of account that holds the annuity.  If you have an IRA annuity, you can move that to another IRA annuity or IRA investment account as a direct rollover and there would be no tax consequences.

Some of you may own what’s called a “non-qualified” annuity.  This account type is not a retirement account and any gains would be taxable as ordinary income if you surrendered it.

Thankfully there is a solution.  The IRS allows you to do a 1035 exchange, which means you can “exchange” your annuity for a different annuity without incurring any tax on the transaction. No-load annuities can be a great solution for these types of “annuity rescue” situations.  You are also able to do a 1035 exchange of your annuity into a long-term care insurance policy.  This can make sense if you are okay with the trade-offs of an asset-based, or hybrid, long-term care policy.

Annuities may or may not make sense for your situation, but they can be a great tool in your retirement tool belt.  Now you know about these newer no-load annuities in case they are more beneficial for your circumstances, or you need to exchange your existing annuity for a better one.

An earlier version of this post appeared on Sixty and Me.