Question

Sophia purchased a variable annuity contract with a purchase payment of $25,000. Surrender charges begin with 7 percent in the first year and decline by 1 percent each year. In addition, Sophia can withdraw 10 percent of her contract value each year without paying surrender charges. In the first year, Sophia needed to withdraw $6,000. Assume that the contract value has not increased or decreased because of investment performance. What was the surrender charge Sophia had to pay?

Answer 1

Answer:

$245

Explanation:

Surrender Charge is a fee on the withdrawal of fund invested in an annuity contract or mutual fund. This charge is placed to restrict or discourage the investor from withdrawing money from the fund.

In this question Sophia paid $25,000 for annuity contract and there are surrender charges as below:

First year surrender charges = 7%

Declines by 1% each year

Withdrawal limit without charge = 10%  of Investment = 10% x $25,000 = $2,500

Withdrawal Amount = $6,000

Withdrawal over 10% = Withdrawal Amount - Withdrawal limit without charge

Withdrawal over 10% = $6,000 - $2,500

Withdrawal over 10% = $3,500

Surrender charges = Withdrawal over 10% x First year surrender charges

Surrender charges = 3,500 x 7%

Surrender charges = $245