Question:
In your explanation re retirement annuity penalties, you state that 'if you transfer or cash in your retirement annuity before maturity date, you are charged a surrender penalty, which is an accelerated recovery of upfront costs mainly broker commission.' Is this true? I was under the impression that broker commissions are reversed when a life insurance retirement annuity is cancelled. Please advise, Thanks, John
Answer:
John, What else would be the (main) basis for the surrender penalty? Life insurance is not compulsory, in the same way that, say, household insurance is not compulsory. If you cancel your stand-alone life cover, would you be charged a penalty? No, because there is nothing to recover. But if you take out life insurance attached to a retirement annuity, you are committing to a specific contract term (to maturity date at least), and the broker is rewarded on that basis. The industry has in the past paid-out broker commissions upfront, typically over the first two years of such a policy. If the policy was cancelled over that period, then the life assurer would seek to recover some of that commission, but not thereafter. If commissions could be reversed/recovered, then the investor would not have to pay the surrender penalties, it would then be the same as merely cancelling your stand-alone life cover. The regulator wants to move to an "as and when" model, paying brokers their commission annually, rather than upfront. This would alleviate the need for surrender penalties.
