FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client invests $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 specifies a 7% surrender charge for withdrawals made in the fifth year, what is the net amount the client will receive?
- A$120,000
- B$112,000
- C$100,000
- D$111,600
Show answer & explanationAnswer & explanation
Correct answer: D. $111,600
The surrender charge is applied to the current account value, not the initial investment. A 7% surrender charge on $120,000 is $120,000 * 0.07 = $8,400. The net amount received is the current account value minus the surrender charge: $120,000 - $8,400 = $111,600.
Why the other options are wrong
- A. This is the current account value before any surrender charges are applied.
- B. This would be the amount if the surrender charge was 7% of the initial investment, or a different percentage of the current value.
- C. This would be the case if there were a 100% surrender charge on the gains, or if the client only got their initial investment back.
Variable Annuity Surrender Value
The surrender value of a variable annuity is the amount an annuitant receives if they withdraw funds or terminate the contract before the annuitization phase. This value is typically the current account value minus any applicable surrender charges.
- Surrender charges are typically a percentage of the amount withdrawn or account value.
- Charges usually decline over a surrender period (e.g., 7 years).
- Surrender charges reduce the amount received by the annuitant.
- Withdrawals before age 59½ may also incur a 10% IRS penalty.
Memory trick: Value Minus Charge Equals Take-Home Cash.