Question 70

Sub-account values fluctuate

Variable annuities are designed to have investment options that can change in value based on the performance of underlying investments, which are typically held in sub-accounts. This means that the value of these sub-accounts can increase or decrease, reflecting the market conditions.

A) Investment risk is borne by the insurer

This statement is incorrect because in variable annuities, the investment risk is primarily borne by the policyholder, not the insurer. The insurer provides a framework for the annuity, but the returns depend on the performance of the chosen investments, meaning the policyholder assumes the risk.

B) Sub-account values fluctuate

This statement is correct as variable annuities include sub-accounts that invest in various assets, such as stocks and bonds. The value of these sub-accounts will fluctuate based on market performance, directly affecting the overall value of the annuity.

C) Guaranteed minimum interest is 4 %

This statement is incorrect as variable annuities do not universally guarantee a minimum interest rate of 4%. The terms can vary significantly among different annuity products, and not all variable annuities offer guaranteed interest.

D) Surrender charges are illegal

This statement is also incorrect. Surrender charges are legal and are a common feature of many annuity contracts, including variable annuities. These charges are meant to discourage early withdrawal from the annuity and can vary in amount and duration.

Conclusion

The correct answer, stating that sub-account values fluctuate, accurately reflects the nature of variable annuities, where policyholders assume investment risk through variable investment options. All other options misrepresent key aspects of variable annuities, such as the distribution of risk, interest guarantees, and the legality of surrender charges.