A client who purchased a variable annuity 3 years ago wants to surrender the contract. The surrender charge schedule is: Year 1 = 7%, Year 2 = 6%, Year 3 = 5%, Year 4 = 4%. If the contract value is $150,000, what is the surrender charge?

Why D — $7,500

Since the client is in the third year of the contract, the applicable surrender charge is 5%. The surrender charge is $150,000 x 5% = $7,500. The client would receive $150,000 - $7,500 = $142,500 (before any applicable taxes and penalties). Surrender charges are designed to discourage early withdrawals and compensate the insurer for upfront sales costs.