South Carolina Life Insurance Practice Exam

What are accumulation units in annuities?

1. Fixed payments made during the annuitization period

2. Ownership interests in the separate account

3. Units of currency used for premiums

4. The total number of beneficiaries

The correct answer is: Ownership interests in the separate account

Accumulation units play a crucial role in understanding how variable annuities work. These units represent an ownership interest in the separate account of the annuity. When a policyholder makes a premium payment into a variable annuity, that payment is converted into accumulation units based on the performance of the investments within the separate account. The value of these accumulation units can fluctuate depending on the investment performance, meaning the amount can increase or decrease over time. As the annuity accumulates value, the policyholder will have a specific number of accumulation units, which will be converted into annuity units when the annuitization phase begins. This conversion is based on the total value of the accumulated units at the time of annuitization and the life expectancy of the annuitant. The proper understanding of accumulation units is essential for comprehending how variable annuities function in terms of both growth potential and the eventual payout. In contrast, the other options provide misleading definitions that do not accurately describe accumulation units. Fixed payments are related to a different type of annuity, while units of currency do not represent ownership or valuate investments. The total number of beneficiaries pertains to a different aspect of insurance and annuities, focusing more on distribution rather than accumulation.