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Finance: What are Surrender Period and Charges? 1 Views
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Description:
What are surrender periods and surrender fees, or charges? Hit play to find out.
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
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Transcript
- 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
Full 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
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