Finance: What are Surrender Period and Charges?

What are surrender periods and surrender fees, or charges? Hit play to find out.

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Transcript

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