Multiple Choice
The company needed to find a way to quantify and report its financial performance. Which of the following best describes the primary purpose of financial accounting?
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1. Introduction to Accounting
Useful Information
Multiple Choice
What is the primary purpose of the surrender charge in a deferred annuity?
A
To discourage early withdrawals and help the insurer recover initial costs
B
To reduce the insurance company's tax liability
C
To increase the annuity's interest rate for the policyholder
D
To provide a bonus payment to the annuitant upon surrender
Verified step by step guidance1
Understand the concept of a deferred annuity: A deferred annuity is a financial product where the policyholder invests money, and the payout begins at a later date. It is designed for long-term savings and retirement planning.
Define surrender charge: A surrender charge is a fee imposed by the insurance company when the policyholder withdraws funds from the annuity before a specified period, typically during the early years of the contract.
Identify the purpose of the surrender charge: The primary purpose is to discourage early withdrawals, ensuring that the policyholder remains invested for the long term. This helps the insurer recover initial costs associated with setting up the annuity, such as commissions and administrative expenses.
Analyze the incorrect options: The surrender charge does not reduce the insurance company's tax liability, increase the annuity's interest rate, or provide a bonus payment to the annuitant. These are unrelated to the function of the surrender charge.
Conclude the correct answer: The surrender charge is primarily designed to discourage early withdrawals and help the insurer recover initial costs, aligning with the long-term nature of deferred annuities.
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