An insured bought an annuity ten years ago and will retire in five years. To determine the value of the annuity, the number of accumulation units owned is multiplied by the value of the separate account. This type of annuity is known as a

Rationale

Variable annuity.

In a variable annuity, the value is determined by the number of accumulation units owned, which fluctuate based on the performance of the separate account investments. This allows the policyholder to benefit from potential market gains, making it distinct from other types of annuities.

A (fixed annuity.) YOUR ANSWER

A fixed annuity guarantees a specific payout amount at retirement, which does not vary based on market performance. The value of a fixed annuity is predetermined and does not rely on accumulation units or separate accounts, making it unsuitable for this scenario where fluctuations in value are noted.

B (variable annuity.) CORRECT

This is the correct choice, as a variable annuity allows the value to change according to the performance of the underlying investments in the separate account. The number of accumulation units owned by the insured directly influences the final value, aligning perfectly with the details provided in the question.

C (flexible annuity.) YOUR ANSWER

A flexible annuity typically allows for varying premium payments and may offer some investment options, but does not specifically refer to the mechanism of determining value through accumulation units. It focuses more on the payment structure rather than the investment performance aspect that defines a variable annuity.

D (accumulation annuity.) YOUR ANSWER

While the term "accumulation annuity" refers to the phase where the investment grows, it is not a recognized type of annuity in the way that fixed or variable are. It does not specify how the value is calculated or linked to the performance of a separate account, which is a key feature of a variable annuity.

Conclusion

Variable annuities are characterized by their dependence on the performance of investment accounts and the calculation of value based on accumulation units. In this case, the insured's annuity aligns with the definition of a variable annuity, which contrasts with fixed, flexible, and accumulation annuities that do not share this particular valuation mechanism. Understanding these distinctions is crucial for making informed financial decisions regarding retirement planning.

An insured bought an annuity ten years ago and will retire in five years. To determine the value of the annuity, the number of accumulation units owned is multiplied by the value of the separate account. This type of annuity is known as a

Variable annuity.

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