In last week’s column, we noted that the imposition of an annuity surrender penalty is designed to provide a means for the issuing company to recoup its selling expenses. The reality of the fixed and fixed index annuity marketplace is that the companies that pay their agents the highest commissions are those companies that market annuities with the longest surrender penalty periods.
Commission rates are established by each respective company and paid by the company as a cost of doing business. Your annuity values are not impacted by those commission rates, other than by having these surrender penalties levied in the event you withdraw 100% of your funds before the expiry of the penalty period.
Reasonable surrender penalty durations are necessary to protect companies, but you may ask: What is a reasonable period? The other side of that coin is: What are the selling commission rates on fixed annuities?
In the case of immediate annuities, there are no surrender penalties, so the agents’ commissions are usually in the 1-2% range, and interestingly, companies will the highest payouts generally pay lower commissions than their less competitive brethren.
It is another matter entirely with deferred fixed and fixed index annuities. Products with 5-year surrender penalty durations usually pay one-time 2-3% rates of commission.
I have personally observed a company that imposed a 14-year surrender penalty period on a fixed indexed annuity, and as a result, the selling agent was paid a commission of upwards of 9% of premium.
Such sales are motivated, sadly, by agent avarice and not by customer needs.
To make matters worse, such products are marketed almost exclusively to seniors who are being told that “you will not lose money if you invest in this indexed annuity product.” That may be true, but unless one dies, that annuity owner will have to wait 14 years, in this case, to have an unfettered right to withdraw all their annuity values.
So, my advice is to avoid doing business with annuity sales agents who sell products with lengthy surrender periods. There are other more customer-centric agents who can provide competitive products.
It pays to shop around before you commit to any agent on the sale of any annuity or life insurance policy.
On another, but somewhat related matter, how safe are your annuity dollars if they are invested in companies with shaky financial ratings? Insurance company insolvencies are rare, but they do occur, and, thankfully, every state has its own state-regulated guaranty association.
The state life and health guaranty association, a special creation of South Carolina state law, is required to protect S.C. policyholders of an insolvent insurance company. The guaranty association cooperates with the commissioner and the deputy receiver in determining whether the company can be rehabilitated or whether policies should be transferred to other insurance companies and the failed company liquidated.
The benefits in South Carolina total to $300,000 in the aggregate. That means that if you have more than this amount invested in one annuity company, and that company is declared insolvent, you could suffer a loss of some, if not all, of the policy values in excess of $300,000.
The bottom line is that you should NEVER invest in a fixed or fixed indexed annuity product from a company that is not rated at least A by A.M. Best’s. If your agent cannot offer an A-rated (or better) company, then find another agent.