Surrender Charge

With 8,000 dollars of cash value and a 500-dollar surrender charge, the net cash surrender value is:

1. A.8,000 dollarsThis is the gross cash value before the charge is applied. The question asks for the net figure the owner actually walks away with.
2. B.500 dollarsThis is the charge itself rather than what remains after it. The charge is the deduction, not the payout.
3. C.7,500 dollarsCorrect - cash value minus surrender charge.
4. D.8,500 dollarsThis adds the charge to the cash value instead of subtracting it. A surrender charge is a cost the insurer imposes, so it reduces what the owner takes away.

Why: 8,000 - 500 = 7,500 dollars.

Marchpane Assurance sells a traditional fixed annuity that credits an interest rate the insurer declares each year and never less than the rate stated in the contract. For federal securities law purposes, this contract is

1. A.not a security, because the insurer rather than the contract owner bears the investment risk.Correct. Risk placement is the test, and here the insurer absorbs any shortfall below the promised floor.
2. B.a security, because the credited rate is permitted to change from one contract year to the next.Wrong. A rate the insurer sets within a guaranteed floor is still an insurance promise, not a pass-through of market results.
3. C.a security, because value accumulates inside the contract on a tax-deferred basis.Wrong. Deferral is a creature of the tax code and has no bearing on how an instrument is classified for securities purposes.
4. D.not a security, but only where the contract is issued without any contingent deferred sales charge.Wrong. A surrender charge is a liquidity term negotiated in the contract and plays no part in the classification.

Why: Whether an insurance product is a security turns on who carries the investment risk. Because Marchpane declares the rate and stands behind a contractual floor, the owner is exposed to the credit of the insurer rather than to market performance, so the contract falls outside the definition of a security and is regulated as insurance. Neither tax deferral nor the presence of a surrender charge enters that analysis. If the contract instead passed market results through to the owner, as a variable or index-linked contract does, registration would follow.

A customer withdraws 20,000 dollars from an annuity in a contract year carrying a 6 percent surrender charge. How much is the surrender charge, and what does the customer receive before taxes?

1. A.A 2,000 dollar charge, leaving 18,000 dollarsThis uses a 10 percent rate. The stated surrender charge is 6 percent.
2. B.A 1,200 dollar charge, leaving 18,800 dollarsCorrect. Six percent of 20,000 dollars is 1,200 dollars, deducted from the withdrawal.
3. C.No charge, because surrender charges apply only at full surrenderSurrender charges apply to withdrawals above any free-withdrawal allowance, not just to full surrenders.
4. D.A 120 dollar charge, leaving 19,880 dollarsThis applies 0.6 percent rather than 6 percent, a decimal slip.

Why: Six percent of 20,000 dollars is 1,200 dollars. The insurer deducts that charge and pays out the remaining 18,800 dollars, which is then subject to income tax on the gain portion.

The cash surrender value of a policy equals:

1. A.Cash value minus surrender chargesCorrect - net of surrender charges.
2. B.Total premiums paidAssumes every dollar paid in is recoverable, but premium also funds the cost of insurance and the insurer's expenses. Especially in the early years, the amount available on surrender sits well below cumulative premiums.
3. C.The full face amountConfuses the living value of the contract with the death benefit. The face amount is payable when the insured dies; surrendering ends the coverage and returns the accumulated value instead.
4. D.Zero alwaysTrue of pure term, and true of a permanent policy in its earliest months, which is what makes it tempting. It is not a general rule: a permanent policy accumulates value over time, and paying that value out is exactly what surrender does.

Why: Cash surrender value = cash value minus any applicable surrender charges.