Sophia purchased a variable annuity contract with $75,000 purchase payment. Surr

Question

Sophia purchased a variable annuity contract with $75,000 purchase payment. Surrender charges begin with 7 percent in the first year and decline by 2 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 $13,000. Assume that the contract value had not increased or decreased because of investment performance. What was the surrender charge Sophia had to pay?

Sophia purchased a variable annuity contract with $75,000 purchase payment. Surrender charges begin with 7 percent in the first year and decline by 2 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 $13,000. Assume that the contract value had not increased or decreased because of investment performance. What was the surrender charge Sophia had to pay?

Explanation / Answer

Variable Annutiy Contract Value =$75,000

Surrender Charges in first year =7%

Amount Withdrawn in first year =$13,000

Annual Withdrawal Limit =0.10 x 75,000 =$7,500

Excess Amount Withdrawn =$13,000 -7,500 =$5,500

Hence, Surrender Charge that Sophia needs to pay =$5,500 x 0.07 =$385

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