Variable Annuities

• Investors buy variable annuities with either a lump sum or a series of small premium payments. The insurer deducts the commission from the premium payments and invests the remaining money in mutual funds. The upfront sales charge normally costs between 5 and 7 percent of the purchase price, so a $100,000 contract would generate a sales commission of between $5,000 and $7,000. A sales agent working for an investment firm would get up to 30 percent of the commission, so on a $100,000 sale, a sales representative could pocket up to $2,100.
  
  

Chargebacks

• Variable annuity contract holders must pay surrender charges if they decide to cash in their policies before the surrender term ends. Normally, surrender terms last for between four and 10 years and begin the day the owner buys the contract. Surrender charges cost up to 7 percent of the purchase price. However, contract owners are not the only ones who must pay penalties for early withdrawals. Most annuity contracts begin with a 12- or 18-month chargeback period during which the agent must pay back any commissions if the owner cancels the contract.
  
  

Deferred Pay

• Some sales representatives and brokers elect not to receive the sales commission from annuities upfront. Instead they receive it after the chargeback period ends, or they receive monthly payments comprised of their annual commissions divided up over the course of the year. Generally, sales representatives who are no longer employed by the firm for which they made an annuity sale that has since been charged back do not have to return the commission. Currently employed salespeople normally have the amount of the chargeback docked from future earnings.
  
  

Conflict of Interest

• Due to the significant commissions that annuity salespeople can earn, state and federal regulators require annuity sales agents to keep detailed records of all sales that explain how the annuity purchase benefited the customer. Internal compliance officers at insurance firms and investment companies must approve all sales before the contracts take effect. Agents and firms that are found to have made sales that did not benefit the customer can face fines and suspensions.