Surrender Rights

Categories: Stocks, Derivatives

Popular in France during the 1940s and with the Iraqi Republican Guard in the 1990s.

In the financial world, surrender rights represent a concept related to life insurance and annuities.

You become convinced you'll live forever. You have a vision after eating a bad kumquat and think that you're the chosen one, destined to live throughout time. The main, near-term takeaway from this revelation: you won't be needing that life insurance you bought.

Luckily, your policy has a surrender clause. The provision means that you can cancel the policy and receive its cash value. You literally surrender the policy (give up your life insurance) and get the amount of cash called for in the contract.

The term applies to annuities as well. Ones with surrender rights can be canceled, with some amount of cash (as stipulated in the contract) getting returned. However, in your case, you think you'll just keep that annuity. After all, its set to pay off for the rest of your life; those actuarials never saw your kumquat vision coming.

Related or Semi-related Video

Finance: What are Surrender Period and C...1 Views

00:00

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

00:08

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

00:13

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

00:18

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

00:24

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

00:29

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

00:34

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

00:39

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

00:43

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

00:48

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

00:53

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

00:56

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

01:00

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

01:07

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

01:12

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

01:16

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

01:21

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

01:25

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

01:29

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

01:33

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

01:37

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

01:41

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

01:45

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

01:48

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

01:52

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

01:56

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

02:00

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

02:04

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

02:08

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

02:12

two years of management fees 1,500 times -

02:15

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

02:18

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

02:23

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

02:27

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

02:32

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

02:37

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

02:42

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

02:48

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

02:54

customer the longer they've held the annuity

02:56

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

02:59

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

03:02

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

03:06

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

03:10

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

03:15

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

03:19

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

03:23

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

03:27

ends here

Find other enlightening terms in Shmoop Finance Genius Bar(f)