FINRA Series 7Investment Information and Suitable RecommendationsHard
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 has a 7-year surrender charge schedule with a 5% charge in year 5, what will be the net amount received by the client?
- A$114,000
- B$100,000
- C$115,000
- D$120,000
Show answer & explanationAnswer & explanation
Correct answer: A. $114,000
First, calculate the surrender charge: 5% of the current account value ($120,000 * 0.05 = $6,000). Then, subtract this charge from the current account value: $120,000 - $6,000 = $114,000. This is the net amount received before any potential taxes on the gain.
Why the other options are wrong
- B. This would be the original investment, ignoring gains and surrender charges.
- C. This would be the net amount if the surrender charge was 4.17% ($5,000).
- D. This is the current account value before any surrender charges are applied.
Variable Annuity Surrender Value
The surrender value of a variable annuity is the current account value less any applicable surrender charges. Surrender charges are fees imposed by the insurance company if the annuity is liquidated within a specified period after purchase.
- Calculated on the current account value.
- Decreases over time according to a schedule.
- Reduces the amount an investor receives upon early withdrawal.
Memory trick: Current Value Minus Charge Equals Cash.