Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksHard
Which of the following accurately describes a characteristic of a variable annuity?
- APayments during the annuitization phase are fixed and do not change.
- BIt provides a guaranteed death benefit equal to the initial investment, regardless of market performance.
- CIt offers a guaranteed fixed rate of return throughout the accumulation phase.
- DThe value of the annuity fluctuates based on the performance of the underlying separate account.
Show answer & explanationAnswer & explanation
Correct answer: D. The value of the annuity fluctuates based on the performance of the underlying separate account.
The value of a variable annuity, both during the accumulation phase and the amount of payments during the annuitization phase, fluctuates based on the performance of the subaccounts in the separate account, which are typically invested in a diversified portfolio of stocks and bonds.
Why the other options are wrong
- A. Payments during the annuitization phase of a variable annuity also fluctuate based on separate account performance, unlike a fixed annuity.
- B. While variable annuities often have a guaranteed death benefit, the guarantee is typically the greater of the account value or the amount invested, not always just the initial investment, and not 'regardless of market performance' in terms of the account value itself.
- C. This describes a fixed annuity, not a variable annuity.
Variable Annuity Characteristics
A contract with an insurance company designed to provide retirement income, where the value and payments fluctuate based on the performance of underlying investment options (separate account).
- Value and payments tied to separate account performance (no guarantees).
- Offers investment choices (subaccounts).
- Subject to market risk.
- Often includes a guaranteed minimum death benefit.
Memory trick: Variable Values Vary, Fixed Funds Firm.