Variable Annuity Surrender Charge and Near-Term Horizon Incompatibility
A 58-year-old client plans to purchase a vacation home in 2 years and needs full access to his $100,000 liquid capital. An agent suggests investing the money into a deferred variable annuity with a 7-year surrender charge schedule (7%, 6%, 5%, 4%, 3%, 2%, 1%). This recommendation is:
Recommending an annuity with a 7-year surrender schedule to a client needing funds in 2 years is grossly unsuitable due to steep surrender penalties and ordinary income tax plus 10% IRS early withdrawal penalties before age 59½.
Complete Analysis & Legal Rationale
Variable annuities are long-term retirement products. Liquidating in 2 years triggers a 6% surrender fee ($6,000 loss) plus tax penalties, violating FINRA Rule 2330 suitability requirements.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Identifies surrender charge conflict with client's 2-year time horizon.
Tax deferral does not justify steep penalties on short-term liquidity needs.
Money market sub-accounts still lock up funds inside the annuity surrender schedule.
B-share contracts carry back-end surrender charges and are unsuitable for 2-year horizons.
Official Standard: Mandates examination of customer liquidity, surrender charge timeline, and tax status.