Question

If the owner prematurely surrenders his deferred annuity before the annuitization period begins, what is most likely to occur?

The owner will receive the premium payments that have been paid into the annuity, plus any interest, minus a surrender charge. If a deferred annuity is surrendered prematurely, a surrender charge is imposed. The charge is generally a percentage that reduces over time until it ends.

Answer 1

The owner of a deferred annuity that is surrendered prematurely will receive their paid premiums plus interest, but this amount will be decreased by a surrender charge. This charge lowers over time and is intended to deter early withdrawals, aligning with the long-term nature of annuities.

Step-by-step explanation:

When the owner prematurely surrenders a deferred annuity before the annuitization period begins, they will typically receive the sum of the premiums paid into the annuity, along with any interest earned. However, this amount is usually reduced by a surrender charge. This charge is often a percentage of the amount being withdrawn and it decreases over time, usually disappearing after a certain number of years, which is known as the surrender period.

The surrender charge is intended to discourage owners from withdrawing funds from the annuity contract early in its term. The reason for this is that annuities are designed to be long-term retirement investment vehicles. By imposing this charge, insurance companies aim to ensure that the annuity owner will keep the investment for a time period that aligns with the deferred annuity's purpose of providing retirement income.