Insurance companies and brokerages provide variable annuities to customers to help fund their retirement. You can make either a lump-sum purchase for the annuity or spread the payments out over time. The company typically invests your payment into a mutual fund that consists of money markets, bonds and stocks. Unlike a mutual fund, variable annuities provide a death benefit that guarantees payment even if your account is not fully funded yet. You, or your beneficiary, can receive periodic payments and you pay no taxes on your income from the annuity until you begin receiving payments. You pay the company a commission fee based on the amount of your purchase and other fees depending on your contract for the annuity.
With a front-end loaded variable annuity, the owner pays a sales charge based on the amount of the purchase. For example, if you purchase a $100,000 variable annuity, and the front-end load is 3 percent, the company keeps $3,000 for its fee. From that money, the broker receives a percentage based on his agreement with the company.
If the company does not have a front-end load fee, it probably charges a back-end load fee if you withdraw your money early. This contingent deferred sales charge, or surrender charge, decreases each year that you own the annuity. For example, if the sales charge is 10 percent, it will decrease one percent each year until, after 10 years, it no longer applies.
If the brokerage does not charge a sales fee, it probably charges a mortality fee. This fee, which typically averages 1.25 percent a year, provides protection from losses that the company can incur if the annuity owner dies before the annuity reaches maturity.
The government has stringent record-keeping rules for companies that sell variable annuities. To pay for the manpower required to remain in compliance with SEC rulings, most sellers charge a yearly administrative fee. This fee can be a fixed amount - usually around $30 - or a percentage of the account's value. Typically, the percentage charge is around 0.15 percent per year.
Other Fees and Expenses
From the income made from your variable annuity, the company will retain funds to pay any expenses charged by the mutual funds backing the investment. While you will not necessarily miss this money because most annuity contracts pay out a specified amount or percentage, it is still money that the broker is making. You will incur additional charges based on any features, such as guaranteed benefits, long-term care insurance and stepped-up death benefits that you purchase for the annuity.
The U.S. Bureau of Labor statistics list the 2010 annual mean wage for agencies, brokerages and other insurance related activities salespersons as $62,910. However, this amount is based on the total income of the agents, not the amount made from sales of variable annuities alone. The amount that a broker earns from variable annuity sales depends on whether he is an independent sales agent or an employee of a company. It also depends on what charges the company assesses for the annuity and the total amount of annuities sold.
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