South Carolina Life Insurance Practice Exam

What typically happens to the value of a variable annuity if the market declines?

1. The value increases

2. The value remains unchanged

3. The value decreases

4. The value is guaranteed to not fall

The correct answer is: The value decreases

In the context of a variable annuity, it is important to understand that the value of the annuity is directly tied to the performance of the underlying investments, which often include stocks and bonds. When the market declines, the investments within the variable annuity also experience a decrease in value. Consequently, this leads to a reduction in the overall value of the variable annuity itself. Variable annuities do not have a fixed interest rate or principal protection that would keep the value steady during market downturns. Instead, they reflect the gains and losses of the investment options chosen by the annuitant. Therefore, if the market is performing poorly and the value of the investments drops, the total value of the variable annuity diminishes as well, which is why the correct response indicates that the value typically decreases in a declining market. To summarize, the decline in the market directly impacts the investment performance linked to variable annuities, resulting in a decrease in their overall value.