FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client invested $100,000 in a variable annuity five years ago. The current account value is $120,000. If the client decides to surrender the annuity, and the contract has a 7-year surrender charge schedule with a current charge of 5%, what amount will the client receive?
- A$100,000
- B$115,000
- C$114,000
- D$120,000
Show answer & explanationAnswer & explanation
Correct answer: C. $114,000
When surrendering a variable annuity, the surrender charge is applied to the current account value, not the initial investment. The client receives the account value minus the surrender charge.
Why the other options are wrong
- A. This would be the case if the account value had not grown and there were no surrender charges.
- B. This might result from an incorrect calculation of the surrender charge or applying it to the initial investment.
- D. This would be the amount received if there were no surrender charges.
Variable Annuity Surrender Value
The amount a client receives upon surrendering a variable annuity, calculated as the current account value minus any applicable surrender charges.
- Surrender charges typically decline over a period (e.g., 7-10 years).
- Charges are applied to the current account value.
- Withdrawals also have tax implications (LIFO for non-qualified).
Memory trick: Surrendering an annuity means your current value takes a hit from the surrender fee, like an early exit penalty.