A client, a 45-year-old high-income professional, is seeking an investment that offers tax-deferred growth, flexible contribution options, and potential for market participation. They are concerned about inflation eroding their purchasing power in retirement and are considering a variable annuity. Which of the following features of a variable annuity would be MOST important to highlight to this client?
- AThe guaranteed minimum death benefit (GMDB) feature.
- BThe ability to choose from a variety of subaccounts linked to different investment objectives.
- CThe absence of investment risk during the accumulation phase.
- DThe fixed income payout option upon annuitization.
Show answer & explanationAnswer & explanation
Correct answer: B. The ability to choose from a variety of subaccounts linked to different investment objectives.
The client expresses concern about inflation and desires market participation to combat it. The ability to choose from a variety of subaccounts (which are essentially mutual funds) within a variable annuity directly addresses these concerns by allowing them to invest in equities or other market-linked options for growth potential and inflation protection. The other options either contradict their needs or are secondary.
Why the other options are wrong
- A. While a GMDB is a feature, it's less relevant to the client's primary concern about inflation and market participation for growth.
- C. Variable annuities have investment risk during the accumulation phase, as subaccount values fluctuate with the market.
- D. A fixed income payout does not address inflation concerns; the client is seeking market participation.
Variable Annuity Subaccounts
Subaccounts within a variable annuity are investment portfolios, similar to mutual funds, that allow the contract holder to direct their premiums into various asset classes to achieve growth and market participation.
- Offer diversification across different investment objectives (e.g., growth, income).
- Provide potential for capital appreciation and inflation hedging.
- Value fluctuates with market performance, introducing investment risk.
- Managed professionally by investment advisors.
Memory trick: Subaccounts for growth, riders for peace, deferred taxes for future release.