FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client invests $150,000 in a variable annuity. Five years later, the account value has grown to $200,000. If the client decides to surrender the annuity, and the contract has a 7-year surrender charge schedule with a 6% charge in year 5, how much will the client receive?
- A$194,000
- B$188,000
- C$200,000
- D$141,000
Show answer & explanationAnswer & explanation
Correct answer: B. $188,000
The surrender value of a variable annuity is the current account value minus any applicable surrender charges. The surrender charge is typically a percentage of the amount withdrawn or the initial investment, decreasing over time.
Why the other options are wrong
- A. This might represent an incorrect surrender charge percentage or calculation.
- C. This implies no surrender charge, which is incorrect given the scenario.
- D. This calculation is incorrect and significantly underestimates the surrender value.
Variable Annuity Surrender Value
The surrender value of a variable annuity is the amount an annuitant receives if they withdraw funds from the annuity before annuitization or before the surrender charge period ends. It is calculated as the current account value minus any applicable surrender charges.
- Surrender charges are penalties for early withdrawals, typically declining over 5-10 years.
- Calculated as a percentage of the amount withdrawn or the initial investment.
- The current account value includes investment growth and contributions.
Memory trick: Current value, less the charge, is what you'll get from the annuity's large.