The no surrender charge FIAArticle added by Roccy DeFrancesco on January 20, 2010
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

The big objection Dateline NBC and many securities-focused advisors have about FIAs is that they have long surrender charges, which is incorrect since there are many five-year surrender charge products out there. An FIA with no surrender charge overcomes this classic, and many times incorrect, objection.

How does this FIA work?

It's as simple as it sounds. At any time, the client can ask for a return of premium (ROP) with no surrender charge. What's the catch? None really, except that if the client exercises this option, the premium will be returned with no growth.

For example, if the client funded $100,000 into an FIA with no surrender charge and in years one, two, or three needed all of the money for medical bills or for any purpose, he/she could get all $100,000 back. The client can still forego the ROP and take 10 percent free withdrawal, or could surrender it in the traditional sense in any year minus the typical 10-year tiered surrender fee (which may be better than asking for a ROP without surrender fees).

Why shouldn't every client buy a no surrender charge annuity?

This won't work for everyone, because although the terms of this annuity are fair, they are not quite as good as annuities that don't have the ROP option.

It's really what Dateline NBC (and many state insurance departments or security-licensed advisors) don't understand. FIAs that have traditional surrender charge fees have higher caps. The longer the surrender charge period, typically, the better the terms of the annuity are for the client.

How does this product affect insurance agents?

It's pretty simple. If more than 10 percent of an insurance agent's clients ask for a return of premium within two years of purchasing the annuity, there is a 100 percent chargeback of the commission.

Why? I'm sure you see how this might be abused otherwise. Imagine if an insurance agent had 10 clients each pour $100,000 into the annuity and in year two, the insurance agent decided that the clients should exercise their return of premium option to fund a different, "better" FIA. Then the agent would make a commission on the ROP FIA and the one that replaced it the following year. While insurance companies aren't always that bright, the one that issues this product is somewhat forward thinking.

What are the commissions on this product?

You'd think they'd be low, but they're not. There are four different payment options (which is nice), and the first year up-front commission is 6.5 percent, which really shocked me. I thought it would be much lower.

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