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The Annuity Model is Broken

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Sheryl Moore

Do you remember the last time that you watched CNN, CNBC, “Shark Tank,” “The Profit,” or even the market update segment of the news? While viewing this programming, have you ever seen commercials for financial services products? I know that I have. I recall commercials for mutual funds and securities.

Once in a great while, I have seen life insurance commercials (on local TV stations), but it is almost always for final expense products that are guaranteed issue, not fully underwritten cash value life insurance. Even less often, I will see ads for life insurance from a certain company that uses a whale for their logo, or a company that seems to always be “on my side,” or even that company that claims to be a “good neighbor.” But what about annuities? Have you ever seen a television commercial for annuities? I haven’t. I’ve never seen a consumer magazine or newspaper ad for annuities from an insurance company either. Billboard? Nope. Radio ad? Uh uh.

It seems that the financial services industry is fantastic at singing the praises of dozens of financial services products, but miserable at touting the benefits of annuities. Why is that?


Distribution’s impact

Historically, life insurance and annuities were distributed through a captive/career agency distribution model. In this channel, the salespeople are employees of the insurance company, and rarely (if ever) sell products for any other insurer. The insurer provides the salespeople with benefits, salaries, leads, training, support, and products. The model was expensive, and often the agent retention wasn’t great (some recent surveys indicate agent retention was only as high as 13% after three years of being trained!). Because of this, many insurance companies wanted to get out of the business of agent recruiting/retention, and focus solely on being a product manufacturer… this resulted in the evolution of the independent agent distribution model.

When insurance and annuities are distributed through independent agents, a third-party intermediary known as a field marketing organization (FMO) or brokerage general agency (BGA) is often used to provide many of the services that an insurance company historically used to: agent recruitment, licensing, training, continuing education, sales support, and more. This leaves the insurance company to focus on what they feel they can do most efficiently, and cost-effectively: manufacturing products.


Commissions on annuities

In the independent agent distribution channel, the carrier pays the FMO/BGA the “all in” commission, once the annuity is sold. The distributor then keeps their portion of the commission (known as the “override”), and pays the remaining commission (“street level commission”) to the producer who closed the sale.

There are a couple of developments that have been occurring in annuity commissions over the past decade that impact our discussion. For one, distributors have been passing down their overrides to street level agents to recruit them away from their competitors, and hoping to make up their shortage on volume, with bonuses. (There is zero new recruitment in this industry.) *sad face* For two, distributors have been “stacking” their contracts under other distributors, in order to aggregate their business, qualify for production bonuses, and thereby earn more commissions. And for three, “commission clubs” and aggregations of distribution groups have also resulted in similar “stacking” arrangements, which ultimately result in bonuses being earned by the distribution, due to higher production levels being attained.


Annuity manufacturers exiting

The top fear of Americans is not death. It isn’t speaking in public. It is running out of money in retirement!

Social Security was only supposed to account for 40% of your retirement income. Now, the Social Security trustees reports in a 2014 report that trust fund reserves will fall to a point where the program will not be able to pay full retirement benefits starting in just 15 more years.

An annuity is the only financial instrument that can guarantee the purchaser an income that they will never outlive.

And yet, insurance companies are pulling the plug on annuities. In December of 2017, Voya announced its intent to exit the annuity business, and followed through less than five months later. In September 2018, Ohio National announced they too would exit the annuity business, and did so less than 30 days later.

Since the market’s collapse in 2008/2009, dozens of insurance companies have been seeking buyers for their distressed blocks of variable annuity assets; containing living benefits which had been mispriced without the consideration of a catastrophic market event. This is what is fueling the mass exodus of annuity manufacturers. Yet on the outside, one would assume that the annuity is a leprous product. It is not.


Annuities: Now what?

It is a product that too many consumers haven’t even heard of, the annuity. The insurance companies aren’t going to promote it – they are solely product manufacturers. Their perception is that they pay a marketing allowance to the FMO/BGA to promote the products.

However, the distributor’s perception is that they cannot afford to promote annuities because they are passing down their overrides to recruit agents. They need every little penny that they keep, just to continue paying the bills. Their perception is that they pay the street level commission to the salesperson to promote the products.

The salesperson’s perception is that they cannot afford to promote annuities because they are working twice as hard this year to make the same amount they did two years ago because the product manufacturer has reduced the commissions on the annuity they’ve been selling. They absolutely need to keep all that they get paid, just to put food on the table for their family.

So, who is going to end up paying?

We all are.

Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resource in Des Moines, Iowa, as well as the market research firm of Wink, Inc. Her companies provide competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at

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