"I am Waving the White Flag Cuz
I Want my Money Now
Demystifying the surrender schedule in
your annuity policy...
is as easy as reading the policy itself...
which most people do not do.
The fact that most folks do not seem to read
their policies is understandable, perhaps not
excusable, but certainly comprehendible.
Many policy owners purchased their contracts
at the suggestion of a trusted advisor while they
were in the midst of doing something else...like
signing legal documents, or moving funds
hither and fro, or simply running fast from a
declining stock market environment. Maybe the
advisor simply said "your principal is guaranteed",
and you signed the policy just like that without giving
it much thought.
But the reality is, your annuity contract has guarantees
that exist for a period of time, and this period of time is called
the surrender schedule.
The Surrender Schedule represents the length of time that your annuity
contract runs for until there are no penalties if you wish to
withdraw 100% of your funds. Annuity contracts can run
for as short as 3 years to as long as 16 years. Typically there
should be some significant bells and whistles (in terms of
bonuses or interest guarantees) if you are willing to commit to the
longer surrender schedules out there.
The subject of the Surrender Schedule in an annuity strikes fear in the heart of many insurance agents because the agent is often afraid that their prospect may be afraid to commit to the term of the annuity
that the agent may be offering. The consequence of the agent's fear and silence on this matter is that a
multitude of annuity policy holders are out there who are literally clueless as to how long their annuity
This is really quite a phenomenon and I have only seen it a milion times !
The origins of this conundrum have to do with its
inventor, the Russian immigrant and PhD. student
Ivanever Soldan Nootie. Mr. Nootie's well
documented academic credentials landed him a job at
Acme Insurance Agency in 1888. He was hired to write
the legal language in the annuity policies that Acme was
selling. Perhaps the Civil War influenced him at the time.
Perhaps his overly academic understanding of the
English language affected his ability to properly market
what he was writing about. For if Ivan had had even a
thimble-full of common capitalist "cents" he would not
have chosen the term surrender ...which, Websters
defines as "to cease resistance to an enemy or
opponent and submit to their authority"
I mean, really ! What was he even thinking, or was he at all even doing that ?
No wonder Annuities seem Ambiguous !
I mean, the one industry that bills and prides itself as the royal custodian of safety for all matters financial at the same time prefers to dole out piecemeal petite tidbits of nourishment at arms length to the heathen masses as long as those masses grovel, whine and surrender themselves ?
More soup please ?
I suppose it is possible that the bean counters at High and Mighty Insurance Company, headquartered out of Arrogant Falls, Minnesota could theoretically take delight in such medievel procedure.
But this would only happen in the dreams of conspiracy theorists. The reality is, businesses that don't brand well, don't end well. Unfortunately, the surrender schedule is often discovered in more detail after the owner has purchased the policy.
But come on people! Make something attractive even after you have sold it to them !
I think that my beloved industry might have an incongruence here - perhaps a case of passive aggression going on. Kind of like a church that does all the right things to get you in the door, then suddenly once you are in, slaps a mutltitude of rules and customs that are downright annoying and strange.
This inconruent terminology in the insurance
industry would be the equivalent of the automobile
industry changing the name of the "Service"
department at the dealership to the "Broken
Engine" department. Just doesn't instill a lot of
Why not use the term Protection Schedule to
reference the length of time that the insurer
guarantees your accumulated principal ? (that
took me 13 seconds to come up with).
The surrender schedule in your policy is typically denoted by one or two horizontal lines with numbers above and below. The numbers above are the year in order, (1,2,3,4 etc...) and the numbers below represent percentages which reference what the % charge will be for each penny that you withdraw over the penalty free amount (which is usually ten percent) ..
It looks something like this :
1 2 3 4 5 6 7 8 9 10
10% 9% 8% 7% 6% 5% 4% 3% 2% 1%
so, if you withdrew $100 more than your penalty free amount in year 5, for example, it would cost you $6.
Keep in mind, you never experience surrender charges if you never withdraw more than your penalty free amount.
Why do these surrender charges exist in the first place?
A surrender charge (if it is ever levied at all), is composed of two costs borne by the insurer that must be recouped if the policy owner ever prematurely cancels the entire contract.
1) Agent Commissions
Your insurance agent makes a living by selling you the annuity
you own. This, of course, is not a bad thing, assuming you trust
your agent and you like the features of your annuity. In all fixed
and fixed indexed annuities the commission is paid from the
insurer to the insurance agent directly. So logically, one must
ask oneself...if the insurer pays my agent directly and that
commission does not come out of my original payment as the
owner, how in the world does all this work ?
Essentially the commission your agent received is already built
into the overall pricing of the annuity policy. The insurance
company will make their annual profit based on the spread
between what they earn annually and what they pay policy
holders annually. However, an insurer usually pays the agent
his or her commissions up front from the time the sale is made,
so it may take several years for the insurer to recoup these specific costs. As such, the agent commission is built into some, but not all, of the surrender charge. It is impossible to say how much of the surrender charge is represented by the commission as the overall pricing of the policy is more complex than mere commissions.
Ironically, if you as the policy owner do not prematurely cancel, it can be stated with transparence that you never did experience a direct sales commission deducted from your original premium payment.
2) Insurance Company Internal Pricing
Potential Surrender charges can be steep, expecially if the insurer
has offered attractive incentives to sign up in the first place. For
example, some annuity companies will offer sizable (10% plus)
signing bonuses, that often continues for multiple years if you
were to add money to the policy. Obviously, the insurer is digging
deep here to incentivize buyers. This money must be recouped
somehow from those owners who do not stay the course.
Also : Above - market interest rates and above - market caps:
Similarly, much like a bank CD, if the insurer is offering higher than average interest rates, these costs must also be recouped for policy holders who depart early. Indexed Insurers also offer caps that limit the amount of stock market - indexed credits a policyholder may receive on an annual or monthly basis. If an insurer has a liberal cap, meaning a high one, sometimes that may be reflected in the size of the surrender charge. In other words, the insurer is giving up more of the earnings to you the policholder than is necessary or normal.
It is interesting to realize that the insurer bargains in your favor with the element of time. In other words, if you give an insurer the right to use your money for an extended period of time, in turn the insurer can offer some attractive interest, index credits and bonus opportunities. These opportunities normally do not exist in the realm of safe investing, but the insurer is able to accomplish it by the virtue (not the curse) of surrender charges and the long term nature of the contract. Not only do these potential surrender charges dissuade someone from prematurely cancelling the policy (and thus making it easier for the insurer to honor the promises it has guaranteed), but the surrender charges recouped from those who do cancel serve the same purpose. Of course, my goal for you as an Ambiguous Annuitant would be that you would not need to do that - especially if we structured your annuity policies at varying maturities.
Are you stuck in an annuity that you want to get out of ?
I will be covering that topic shortly. Stay tuned !!
One last thing. Ivanever, the Russian PhD immigrant I
mentioned above, in case you did not figure this out by
now, never existed. If you read his name quickly you
will understand what I was getting at.