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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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two years of management fees 1,500 times -

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

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

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

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

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

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

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

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

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customer the longer they've held the annuity

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

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

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

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

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

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

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

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

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ends here

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