A client, aged 60, is considering purchasing a variable annuity and is concerned about the impact of surrender charges if they need to access their funds unexpectedly. Which of the following statements regarding variable annuity surrender charges is most accurate?
- AMost variable annuities offer a 'free-withdrawal' provision, allowing annual withdrawals of a small percentage of the contract value without penalty.
- BSurrender charges typically apply only during the accumulation phase and generally decline over a specified period.
- CSurrender charges are fixed at a statutory maximum of 10% of the contract value for the life of the contract.
- DSurrender charges are waived if the annuitant dies or becomes disabled, regardless of the contract terms.
Show answer & explanationAnswer & explanation
Correct answer: A. Most variable annuities offer a 'free-withdrawal' provision, allowing annual withdrawals of a small percentage of the contract value without penalty.
Most variable annuities include a free-withdrawal provision, typically allowing withdrawal of 10% of the contract value annually without incurring surrender charges. Surrender charges usually decline over time and are not fixed for life or automatically waived for death/disability.
Why the other options are wrong
- B. While surrender charges usually decline over time, they can also apply during the payout phase for certain withdrawals, and this statement is not as universally accurate as D.
- C. There is no fixed statutory maximum of 10% for the life of the contract; charges vary by contract and typically decline.
- D. Waiver for death or disability is common but not universal and depends on specific contract provisions, making it 'not necessarily' true.
Variable Annuity Surrender Charges
Surrender charges are fees assessed by the insurance company if a variable annuity contract is terminated or if withdrawals exceeding a specified amount are made during the initial years of the contract (the surrender period).
- Declining schedule over a surrender period (e.g., 7-10 years).
- Typically waived for death or annuitization.
- Most contracts offer a 'free-withdrawal' provision (e.g., 10% annually).
- Designed to recoup sales commissions and expenses.
Memory trick: Don't 'Surrender' your annuity early, or you'll pay a 'Fee' that 'Declines' with 'Time'.