A fixed-indexed annuity is a type of life insurance contract that provides you with tax deferral benefits and an eventual income stream. You can buy one of these contracts from a state-licensed insurance agent. As with other types of insurance policies, agents receive commissions for selling these contracts. Commission amounts vary, but they are usually larger than those paid on other types of annuity contracts.
You can buy a fixed-indexed annuity either with a lump sum payment or a series of deposits over the course of several months or years. The annuity company puts your cash into a holding account. The account is tied to an index like the Standard & Poor's 500. If the index increases in value, the annuity company adds money to your account. If the index drops in value, you still receive a fixed rate of return, but only on 85 percent or 90 percent of your original investment. The insurance company keeps the other 10 percent or 15 percent of your money. When the contract term ends, you can cash in your annuity. In an up market you may make a lot of money, but in a down market you may end up with less than you invested.
Fixed-indexed annuities often have terms of 10 years or more. You are effectively lending your money to an insurance firm during this time frame. An insurance firm could make a significant return on your money even after setting aside cash to cover your returns. Insurance firms impose surrender penalties that can top 20 percent to discourage you from cashing in your annuity early. Due to the term lengths and fees, fixed-indexed annuities are highly profitable for insurance firms. Needless to say, agents who sell these contracts are well-rewarded.
When you buy an indexed annuity the sales agent receives a commission payment equal to between 2 percent and 10 percent of the purchase price. You don't pay this fee out of pocket, but you effectively pay it over the long term since the insurance firm recoups the money by making money on your investment and deducting various fees from your contract's value. If you die, your contract is terminated and the proceeds pass to your beneficiary. Agents receive higher commissions for selling annuities to young people because they are likely to live longer than the elderly.
Agents receive their commission as either a one-off payment when the contract is issued or as a series of payments over the course of the annuity term. Many firms include a chargeback provision on annuity contracts. This means the insurance firm can require the agent to pay back the commission if you cancel your contract within a year of the purchase date. Some states have laws allowing you to get your money back penalty-free within 30 days of buying an annuity. Chargeback provisions mean that agents rather than insurance firms lose out when you back out of a contract.
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