Annuity share class C. After 3 years, she surrenders the annuity so she can take the $100,000 and go on a lavish round-the-world vacation. If her annuity is typical for share class C, how much will she pay in surrender charges?
Answer (2)
Determine the surrender charge percentage for year 3, which is 5%.
Calculate the surrender charge amount: $100,000 \times 0.05 = $5,000.
The surrender charge is $\boxed{ 5,000} .
Explanation
Understanding the Problem Let's analyze the problem. We are given that a person surrenders a share class C annuity after 3 years and withdraws $100,000. We need to determine the surrender charges. Typical share class C annuities have surrender charges that decrease over time. A common surrender charge schedule for share class C annuities starts at 7% in the first year, decreasing by 1% each year until it reaches 0%.
Determining the Surrender Charge Percentage Based on the typical surrender charge schedule, let's determine the surrender charge percentage for the 3rd year:
Year 1: 7%
Year 2: 6%
Year 3: 5%
Calculating the Surrender Charge Now, we calculate the surrender charge amount by multiplying the withdrawal amount ( 100 , 000 ) b y t h es u rre n d erc ha r g e p erce n t a g e ( 5 S u rre n d er C ha r g e = Wi t h d r a w a l A m o u n t × S u rre n d er C ha r g e P erce n t a g e $Surrender\ Charge = 100 , 000 × 0.05 $Surrender\ Charge = 5 , 000 $
Final Answer Therefore, the surrender charge the person will pay is $5,000.
Examples
Annuities are often used for retirement planning. Understanding surrender charges is crucial when making financial decisions about accessing funds before the end of the annuity term. For instance, if someone needs to access their annuity funds early for an emergency, knowing the surrender charge helps them calculate the actual amount they will receive after the penalty. This knowledge aids in making informed decisions about whether to surrender the annuity or explore other financial options.
The surrender charge for the student who surrenders her class C annuity after 3 years is 5%. Therefore, the charge on her $100,000 withdrawal will be $5,000. This charge is calculated by multiplying the withdrawal amount by the surrender charge percentage for the third year.
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