AD Banker Comprehensive Practice Exam

What distinguishes a variable annuity from other types?

1. Guaranteed returns

2. Investments linked to market performance

3. Fixed interest rates

4. Payments based on a single premium

The correct answer is: Investments linked to market performance

A variable annuity is primarily distinguished by its investment options, which are linked to the performance of various market assets. This means that the returns on a variable annuity can fluctuate based on the performance of the funds chosen by the policyholder. Unlike fixed annuities that offer guaranteed returns or fixed interest rates, variable annuities provide the potential for higher returns commensurate with the market risk taken. The ability to invest in a range of portfolios, such as stocks and bonds, fundamentally sets variable annuities apart from other types. This element of market performance is crucial, as it allows for the possibility of growth over time, albeit with the recognition of the potential for loss as well, depending on market conditions. In contrast, fixed interest rates provide a predictable return without the potential for growth beyond the stated interest, and guaranteed returns suggest a level of security not characteristic of variable annuities. Additionally, payments based on a single premium do not define the nature of variable annuities, as this feature might apply to other annuity types as well. The unique characteristic of variable annuities lies in their direct connection to the market, making this the correct identification of what sets them apart.