Maryland Life and Health Insurance License Practice Exam

What is the nonforfeiture value of an annuity before annuitization?

1. All premiums paid, plus interest, minus any withdrawals and surrender charges

2. All contributions plus dividends

3. Face amount of the policy

4. None of the above

The correct answer is: All premiums paid, plus interest, minus any withdrawals and surrender charges

The nonforfeiture value of an annuity before annuitization refers to the amount that an annuity owner can receive if they decide to cancel or surrender the annuity before they start taking regular payments (annuitization). This value is essentially a safeguard for the policyholder, ensuring that even if they choose not to continue with the annuity, they can retrieve a significant portion of their investment. The correct answer encompasses all premiums paid into the annuity, along with any accumulated interest earned on those premiums. However, it also accounts for any withdrawals the policyholder may have taken or any surrender charges that apply. Surrender charges are fees imposed by the insurance company when the annuity is surrendered before a specified period, and they reduce the amount the policyholder ultimately receives. Thus, the nonforfeiture value effectively represents a fair and calculated return of the policyholder's investment, acknowledging both the savings accrued and the costs incurred. The other options do not accurately represent this concept; they either define different values associated with insurance policies or miss important deductions and considerations that apply in the calculation of nonforfeiture values.