What is the purpose of surrender charge schedules in a variable annuity?

• A. They encourage early withdrawals
• B. They penalize early withdrawals to recoup costs
• C. They guarantee higher returns
• D. They have no purpose

Answer: (B)

Surrender charge schedules exist to recover the costs the insurer incurs when a variable annuity is issued and to fund the guarantees built into the contract. When you buy one, the insurer often pays sales charges, issue costs, and the upfront risk of providing guarantees. If you withdraw money early, those costs aren’t fully offset, so the surrender charge acts as a penalty to recoup them and to discourage short-term moves that would leave the insurer with unrecovered expenses. The charge typically steps down over time, reflecting that the money has been invested longer and the initial costs have been absorbed. Once the surrender period ends, withdrawals usually avoid these charges (though other fees may apply). This mechanism isn’t about guaranteeing higher returns; it’s about protecting the product’s economics and ensuring long-term funding for guarantees and stability for all contract holders.