Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceEasy
A client purchased a single premium deferred annuity (SPDA) for $200,000. Over time, the annuity has accumulated $50,000 in interest. If the client decides to surrender the annuity for its cash value, how much of the surrender value will be considered taxable income?
- A$0, as annuities are tax-deferred.
- B$50,000
- C$200,000
- D$250,000
Show answer & explanationAnswer & explanation
Correct answer: B. $50,000
When a deferred annuity is surrendered, the amount received that exceeds the cost basis (premiums paid) is considered taxable income. In this case, the $50,000 of accumulated interest is the taxable gain.
Why the other options are wrong
- A. While growth is tax-deferred, surrender triggers taxation of the gain.
- C. The original premium of $200,000 is the cost basis and is returned tax-free.
- D. The total surrender value is $250,000, but only the gain ($50,000) is taxable income.
Deferred Annuity Surrender Taxation
Upon surrender of a deferred annuity, the amount received that exceeds the total premiums paid (cost basis) is considered taxable income, taxed as ordinary income.
- Taxation applies to the gain (interest earned).
- Cost basis (premiums paid) is returned tax-free.
- Taxed as ordinary income, not capital gains.
Memory trick: Surrender means gain is TAXED, basis is FREE.