Surrender Rights

finance a la shmoop what our surrender periods and surrender fees or charges

alright people they're all about insurance annuities and how investors in

them well get charged remember that an annuity is a kind of insurance product

where the buyer pays now say 50 grand a year each year for five years for a

total of 250 grand upfront that money then buys some insurance policy that

pays three million bucks if they die at any moment from the time that first 50

grand was paid until you know Kingdom Come and the payout number probably goes

up from there as they get older and it could have a value forty years from when

that first payment was made such that the investor could cash it out for a

million box along the way or five million bucks along the way after 28

years or whatever the contract stipulated it's kind of an investment

albeit usually not a very good one well the question here revolves around

how commissions are paid and how annuity buyers pay the broker buy an annuity

well your basic vanilla insurance product and you have to hold it some set

minimum number of years like five seven and fifteen yeah something like that [annuity ice cream cone]

long enough anyway so that the annual money management fee that goes along [rolls of money]

with it is enough to cover paying the commission of the broker who sold it to

you and annuities are famous for paying very high commissions to brokers like if

you've bought two million bucks worth of coverage for a hundred grand today well

your broker would normally get three grand up front for having had the

privilege of selling you that policy or thereabouts the management fee per year

might be something like a one and a half percent or so on that hundred grand

so you'd pay fifteen hundred dollars a year to the money management company

behind everything well in a normal structure they might take enough three

years to pay that broker a grand a year keeping five hundred bucks a year for

themselves you know to keep the lights on and pay rent and yes over time the

market goes up and the fees go up so this is a conservative set of

arithmetics here but go with us the funds might also just pay upfront the [guy studying math, briefcase full of money]

commission of three grand to the broker making up those revenues in the first

two years of management fees 1,500 times -

and then more than making up the difference to pay their own money

managers in year three four five six and twenty nine so this system revolves

around a minimum number of years then that the customer who bought the

insurance policy has to hold that policy and not sell it a redeem it so that they

don't have to pay a commission like it's kind of like a quasi no-load structure

there that is if they do surrender their annuity ie redeem it well then they also

surrender there no charge or no commission or No Fee status and they [stacked sandbags]

then pay a surrender charge which in normal policies declines in cost to the [guy waves white flag behind sandbags]

customer the longer they've held the annuity

product like hold it a decade or more usually and there's absolutely no charge

upfront because the broker has been more than paid out of the management fee

that's annual all right well the basic idea here is that brokers must be paid

and that payment has to come from the buyer it can come up front in the same

way a shares of a mutual fund are sold or it can be deducted from management

fees in small parts each year for you know five 10 20 years or whatever the

deal is that the managers of the fund cut with the brokers who sold it it's a [money bribe exchange]

story filled with drama tears laughter and guacamole but ultimately well it all

ends here