Question 34

A surrender charge is typically assessed when a deferred annuity is canceled during the early contract years.

When a deferred annuity is canceled early, the insurer often imposes a surrender charge as a penalty for withdrawing funds before a specified period. This charge helps the insurer recover some of the costs associated with the contract.

A) cost of living adjustment

A cost of living adjustment is related to increasing the payout amounts in accordance with inflation, not a penalty for early cancellation of an annuity. Therefore, this option is incorrect as it does not pertain to the charges applied when an annuity is canceled.

B) bonus rate

A bonus rate refers to an additional interest or benefit that may be added to the annuity, often at the start of the contract. It does not relate to any penalties for early withdrawal and is not applicable in this context, making it an incorrect choice.

C) surrender charge

A surrender charge is the fee that insurers typically impose when a policyholder cancels their deferred annuity in the early years of the contract. This charge compensates the insurer for the costs incurred and serves as a deterrent to early withdrawals, confirming this as the correct answer.

D) withdrawal corridor

A withdrawal corridor is a concept that refers to a limited range within which withdrawals can be made without incurring penalties. However, it does not directly relate to a penalty for early cancellation and is therefore not relevant to the question, rendering it incorrect.

Conclusion

The surrender charge is the correct answer as it specifically addresses the penalty incurred when a deferred annuity is canceled prematurely. Other options do not represent charges or penalties related to early cancellation, confirming their inapplicability in this situation. Thus, understanding the nature of surrender charges is essential in the context of deferred annuities.