Question 70

Sub-account values fluctuate

Variable annuities are designed to allow the investment risk to be borne by the policyholder, leading to fluctuations in the value of the sub-accounts based on market performance.

A) Investment risk is borne by the insurer

This statement is incorrect as variable annuities are structured such that the investment risk is primarily taken on by the policyholder. The insurer does not guarantee the investment performance of the sub-accounts; hence, the values can vary significantly.

B) Sub-account values fluctuate

This statement is correct because variable annuities include various sub-accounts that invest in a range of securities, whose values change with market conditions. This fluctuation is a fundamental characteristic of variable annuities, reflecting the performance of the underlying investments.

C) Guaranteed minimum interest is 4 %

This option is misleading as variable annuities do not necessarily come with a guaranteed minimum interest rate of 4%. The guaranteed interest rate can vary by the specific product terms and is not universally set at 4%.

D) Surrender charges are illegal

This statement is incorrect. Surrender charges are legal and are often included in variable annuity contracts to cover the insurer's costs if a policyholder withdraws funds before a specified period. They are a common feature, not prohibited by law.

Conclusion

The correct answer, that sub-account values fluctuate, accurately reflects the nature of variable annuities, where market performance dictates investment outcomes. Other options misrepresent the concepts of risk, guarantees, and legalities associated with variable annuities, confirming that they do not capture the essence of how these financial products operate.