What Are Commission-Free Annuities And Are They Good For Retirement?

Annuities are often popular with retirees and those looking to retire because of the steady income stream they can provide. But annuities tend to come with high costs and commissions for salespeople that eat into investors’ returns.

Some firms now offer annuities without commissions, which could be better for investors. Here’s what you need to know about commission-free annuities.

What are annuities and how do they work?

Annuities provide a stream of income in return for money being paid into the annuity. You may deposit a lump sum of money when purchasing the annuity or make payments to a life insurance company over time.

Annuities are often used as a part of someone’s retirement plan and can be customized based on a client’s needs. An annuity may pay out over a fixed period of time or it may provide income for the remainder of someone’s life, which is attractive for retirees looking for financial security.

However, annuities can be complex and can come with high fees. Historically, annuities have been associated with sales commissions for the agents that sell them, sometimes running 6 percent or more. These commissions create an incentive for agents to sell annuities even if they aren’t necessarily the best choice for investors.

What are commission-free annuities?

Commission-free annuities, also called no-load annuities, cut out the salesperson’s commission. That usually results in lower costs compared to traditional annuities, which have commissions baked in.

“In our experience, when investors find out commission-free annuities are available, they are very interested because the costs are lower and the payout rates are higher than commissioned products,” says Jonathan Barth, vice president of member success at DPL Financial Partners, which runs a platform for commission-free annuities.

Companies like DPL Financial give advisors access to these products when they already charge clients a fee, so the annuity fits into a client’s broader financial plan.

Commission-free annuities are designed to offer the following core benefits, among others:

• Lower costs: By eliminating sales commissions, these annuities can significantly reduce the overall costs for investors, potentially leading to higher returns.
• Transparency: Commission-free annuities often have a more transparent and straightforward fee structure, making them easier for investors to understand.
• Alignment with investor’s interest: Because these annuities are often offered by fee-only financial advisors, they can be more aligned with investor interests.

“Commission-free annuities are driving competition and transparency in the insurance marketplace,” says Barth. 

That being said, even these annuities can come with fees you may not expect, and they directly limit the return you ultimately earn as an investor. 

The role of financial advisors in commission-free annuities

Financial advisors play an important role in the selection and performance of commission-free annuities.  Fee-only advisors, who don’t earn commissions, may recommend these products because their compensation comes from advice, not from selling insurance contracts. That structure puts the advisor’s interests more in line with the client’s.

Think of it this way: With commission-free annuities, clients are buying a product; with commissioned annuities, an agent is selling one.

Under the commission model, many advisors struggled to act fully as fiduciaries because the incentives weren’t aligned.

Barth says that dynamic is shifting. 

“While much of the financial services industry has already moved to commission-free products, the insurance sector has been slower to adopt them,” says Barth. “We are now seeing more carriers bring commission-free products to the market.”

The business model of commission-free annuities

Even with a commission-free setup, the overall cost of an annuity will depend on multiple factors, such as the specifics of the annuity product, the advisor’s fees and the performance of underlying investments (if any) within the annuity.

Insurance companies earn revenue from management and administrative fees, along with mortality and expense (M&E) charges. Commission-free products typically charge lower M&E fees — about 0.20 to 0.50 percent, according to Barth — compared with 0.50 to 1.5 percent for commissioned annuities.

Other charges, such as surrender fees for early withdrawals, specialized features and add-on riders can increase costs and reduce returns. Riders that provide extra insurance protection or lifetime income are especially likely to raise expenses. In general, the more complex the annuity, the higher the price tag. 

Because fees can vary widely from one insurer to another, it’s essential to read an annuity contract carefully. Make sure you understand every cost — both upfront and ongoing — so you know exactly how the product will affect your returns before committing.

Commission-free annuities: Are they good for retirement?

Many retirees are attracted to the concept of annuities because they can provide an income stream for the rest of your life, similar to the way defined benefit pension plans work. Annuities also allow for tax-deferred growth.

Annuities may be a good fit for high-earners who are looking to boost their retirement savings beyond what they can contribute to accounts such as 401(k)s or IRAs. Annuities don’t have contribution limits, so you can put as much money into an annuity as you’d like.

Annuities can also appeal to people who value predictability. Unlike investments that rise and fall with the market, certain types of annuities can lock in guaranteed payments or protect your principal. This stability can make them useful for balancing out riskier assets in a retirement portfolio.

At the end of the day, annuities aren’t one-size-fits-all. Your age, income needs, risk tolerance and other assets all play a role in whether they make sense for you. That’s why it’s important to evaluate your own financial situation and, ideally, work with a qualified financial advisor who can help you weigh the pros and cons before making a decision.

Bottom line

Annuities are popular with retirees because they can provide a stream of income for a certain period of time or even for the remainder of their lives. However, annuities often have high fees and can come with huge commissions for salespeople. Commission-free annuities may be a better choice, but be sure you understand all the fees you’ll be paying before signing on the dotted line.

Consider consulting with a fee-only financial advisor who acts as a fiduciary before purchasing an annuity. 

—Bankrate’s Rachel Christian contributed to an update of this article.