FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeHard
A client, aged 45, is considering purchasing a variable annuity and is concerned about accessing their money before retirement without significant penalties. Which of the following features would be MOST relevant to their concern?
- AThe guaranteed minimum withdrawal benefit (GMWB) rider.
- BThe surrender charge schedule and potential IRS penalties.
- CThe performance of the underlying subaccounts.
- DThe annuity's mortality and expense (M&E) charges.
Show answer & explanationAnswer & explanation
Correct answer: B. The surrender charge schedule and potential IRS penalties.
For a 45-year-old client concerned about early access, the surrender charge schedule (imposed by the insurance company for withdrawals during the initial contract period) and potential IRS 10% penalty for withdrawals before age 59½ are the most relevant factors impacting their ability to access funds without significant cost.
Why the other options are wrong
- A. A GMWB rider is designed to guarantee a minimum income stream in retirement, not to facilitate penalty-free early access to the principal.
- C. Subaccount performance affects the annuity's value, but not the penalties for early withdrawal.
- D. M&E charges are ongoing fees, not directly related to early access penalties.
Variable Annuity Early Withdrawal Penalties
Early withdrawals from a variable annuity before retirement may incur surrender charges from the insurer and a 10% IRS penalty if the annuitant is under age 59½.
- Surrender charges (insurer-imposed)
- 10% IRS penalty (pre-59½)
- Applies to earnings withdrawn
- Significantly reduces early access funds
Memory trick: Early exit? Beware the 'Surrender Charge' and 'IRS Penalty' wall!