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Which of the following is a correct statement regarding variable annuities?

Rationale

Sub-account values fluctuate.

Variable annuities have investment components known as sub-accounts, which are similar to mutual funds. The values of these sub-accounts can change based on market performance, meaning that the account holder assumes the investment risk rather than the insurer.

A (Investment risk is borne by the insurer) YOUR ANSWER

In variable annuities, the investment risk is actually borne by the policyholder, not the insurer. The insurer guarantees a certain structure for the annuity, but the performance of the sub-accounts depends on the market, placing the risk on the investor.

C (Guaranteed minimum interest is 4 %) YOUR ANSWER

While some variable annuities may offer a guaranteed minimum interest rate, this rate is not universally set at 4%. The guaranteed minimum interest rates can vary widely depending on the specific annuity contract and the issuing insurance company.

D (Surrender charges are illegal) YOUR ANSWER

Surrender charges are not illegal; rather, they are common features in many annuity contracts. These charges are applied if the investor withdraws funds from the annuity within a specified period, typically to discourage early withdrawal and protect the insurer's investment.

Conclusion

In variable annuities, the value of sub-accounts is subject to market fluctuations, which directly affects the investment outcome for the policyholder. While investment risks, guaranteed interest rates, and surrender charges are important considerations, they do not accurately characterize the core feature of variable annuities, which is the variability of sub-account values. Understanding this distinction is crucial for investors when evaluating their options in annuity products.

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