When a deferred annuity is canceled during the early contract years, the insurer normally will assess a back-end load known as a

Rationale

Surrender charge

When a deferred annuity is canceled during the early years of the contract, insurers typically impose a back-end load known as a surrender charge. This fee is designed to recover some of the costs associated with the issuance of the annuity and to discourage early withdrawals.

A (cost of living adjustment) YOUR ANSWER

A cost of living adjustment (COLA) refers to an increase in benefits to keep pace with inflation and is not related to the cancellation of an annuity. It is generally applicable to pensions or other income streams and does not impose a fee for early withdrawal or cancellation of financial products like annuities.

B (bonus rate) YOUR ANSWER

A bonus rate is an incentive offered by insurers to attract customers and is typically added to the initial investment or credited to an annuity contract. It does not serve as a charge or fee related to contract cancellation, and thus does not apply in this context.

C (surrender charge) CORRECT

A surrender charge is a specific fee assessed by the insurer when a policyholder cancels a deferred annuity before a certain period, usually the first several years of the contract. This charge compensates the insurer for the initial costs incurred in setting up the annuity and discourages early withdrawals, making it the correct answer to the question.

D (withdrawal corridor) YOUR ANSWER

A withdrawal corridor refers to a provision that allows for partial withdrawals from an annuity or insurance product without incurring penalties. It does not apply to the cancellation of the contract itself and therefore does not represent a fee assessed upon early termination.

Conclusion

In the context of deferred annuities, a surrender charge is commonly imposed when a contract is canceled during the early years. This fee is essential for the insurer to recover initial costs and maintain contract integrity. Other terms, such as cost of living adjustments, bonus rates, and withdrawal corridors, do not pertain to the penalties associated with early termination of annuity contracts. Understanding these distinctions is crucial for effective financial planning and decision-making regarding annuities.

When a deferred annuity is canceled during the early contract years, the insurer normally will assess a back-end load known as a

Surrender charge

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