South Carolina Life Insurance Practice Exam

Which of the following is TRUE regarding variable annuities?

1. The contract offers guaranteed returns

2. The annuitant assumes the risks on investment

3. The payments are fixed over time

4. The payout period must be five years

The correct answer is: The annuitant assumes the risks on investment

Variable annuities are unique financial products that allow the annuitant to have their money invested in various securities, typically mutual funds. This investment strategy means that the performance of the annuity is linked to the performance of the chosen investments, leading to a potential return that can fluctuate. When saying that the annuitant assumes the risks on investment, it correctly highlights one of the defining features of variable annuities. Unlike fixed annuities, which provide guaranteed returns, variable annuities do not assure a set rate of return. The annuitant's account value can rise or fall depending on how the underlying investments perform, meaning they take on the investment risk. The other options do not align with the nature of variable annuities. They do not provide guaranteed returns; instead, the returns are variable and depend on market performance. The payments associated with variable annuities are not fixed, as they can vary based on investment performance and how funds are allocated. Additionally, while it's common for annuities to have various payout options, there isn't a universal requirement for the payout period to be five years, making that statement misleading.