Variable Annuities and Life Insurance

A variable annuity's investment return each month is based on

The performance of the separate account. Explanation A key feature of the variable annuity is that the premium is invested into the insurance company's separate account rather than the general account. It is the performance of the separate account that provides the annuity's investment return each month. There are no guarantees as to the separate account performance or return each month.

If the portfolio of a variable annuity separate account is directly and actively managed by the insurance company, the separate account must be registered as

An open-end management investment company. Explanation If managed by the insurance company's own investment advisor, a separate account must register as an open-end company. If it is managed by a third party, it must register as a unit investment trust.

Which are the most likely to make monthly or quarterly payments for the life the investor?

Fixed annuity AND Variable annuity Both a fixed and variable annuity is an insurance contract designed to provide retirement income. The term annuity refers to a stream of payments guaranteed for a certain period including the life of the annuitant. In the case of a variable annuity, the actual amount to be paid out may or may not be guaranteed, but the stream of payments itself is. Because an annuity can provide an income for life, the contract has a mortality guarantee. Mutual funds and UITs have no such guarantee.

What does the mortality guarantee of a variable annuity insure?

That payments will continue for the life of the annuitant Explanation The mortality guarantee of a variable annuity, which the insurance company assumes as part of mortality risk, insures that payments will continue for the life of the annuitant. It does not guarantee the size of the payments.

Why is a fixed annuity not considered to be a security?

The fixed annuity buyer assumes no investment risk. Explanation With fixed insurance products such as whole life insurance and fixed annuities, the insurance company assumes the investment risk. This elimination of investment risk for the purchaser is what differentiates the product from a security. Note that with fixed products, even though not a security, the purchaser faces inflation risk.