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, often masquerading as financial advisors, 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.
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 high sales commissions for the agents that sell them, often 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.
Commission-free annuities are what they sound like: annuities that don’t include a commission to the salesperson. These annuities, also called no-load annuities, typically have lower costs than annuities that include commissions.
Commission-free annuities are designed to offer the following core benefits, among others:
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Lower costs: By eliminating sales commissions, these annuities can significantly reduce the overall costs for investors, potentially leading to higher returns.
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Transparency: Commission-free annuities often have a more transparent and straightforward fee structure, making them easier for investors to understand.
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Alignment with investor’s interest: As these annuities are often offered by fee-only financial advisors, they can be more aligned with investor interests.
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. It’s worth consulting with a financial advisor who’s a fiduciary before buying an annuity to make sure you understand exactly what you’re buying and what you’ll get in return. The more complicated your annuity is, the more expensive it’s likely to be.
Keep in mind that many people who sell annuities call themselves financial advisors, but a fiduciary is required to put your interests before their own. If you’re looking for a financial advisor in your area, consider using Bankrate’s financial advisor matching tool.
