Assumed Interest Rate

The assumed interest rate (AIR) in a variable annuity is:

1. A.A benchmark used to set changes in variable paymentsCorrect - payments adjust relative to the AIR.
2. B.The sales loadThe AIR is an actuarial assumption built into the payout formula, not a charge deducted from the investor. Sales charges on a variable annuity are separate items disclosed in the prospectus, and changing the AIR changes the shape of the payment stream rather than the cost of the contract.
3. C.A guaranteed minimum returnThis is the most seductive answer because the AIR does look like a promised rate. It is a hurdle, not a floor: if the separate account earns less than the AIR, the next payment goes down, and it keeps going down as long as performance trails. A contract that actually guaranteed a minimum would be a fixed annuity, where the insurer bears the investment risk.
4. D.The surrender charge rateSurrender charges and the AIR live in different phases of the contract. Surrender charges are a declining schedule that penalizes withdrawals during accumulation; the AIR only matters once the contract is annuitized, where it sets the benchmark each period of separate-account performance is measured against.

Why: The AIR is a benchmark used to determine changes in variable annuity payments; actual separate-account performance above or below the AIR raises or lowers the next payment.

During the accumulation phase of a variable annuity, purchase payments buy accumulation units. When the contract is annuitized:

1. A.The value is converted into a fixed number of annuity units whose per-unit value then fluctuates with separate account performanceCorrect. Fixed unit count, floating unit value, which is why the monthly payment varies.
2. B.Accumulation units continue to be purchased with each annuity paymentAccumulation ends when the payout phase begins; no further units are purchased.
3. C.Payments become a fixed dollar amount guaranteed by the insurer for lifeThat describes a fixed annuity. A variable annuity's payments move with the separate account.
4. D.The number of annuity units changes each month while the value per unit stays fixedThis reverses the mechanism. The unit count is set once at annuitization.

Why: At annuitization the accumulated value is converted into a fixed number of annuity units, and that number never changes for the rest of the contract. What changes each period is the value of an annuity unit, which rises or falls with separate account performance relative to the assumed interest rate. That is what makes the payment variable. The clue is which quantity is fixed and which floats.

An investor annuitizes a variable annuity. In the payout phase, the number of annuity units is fixed, but the monthly payment amount...

1. A.varies with the separate account's performance relative to the AIRCorrect — annuity units are fixed while payments vary against the AIR.
2. B.is fixed and guaranteed for lifeA fixed, guaranteed payment describes a fixed annuity, not a variable one.
3. C.increases by a set percentage each year regardless of performancePayments track separate-account performance, not a fixed annual increase.
4. D.equals the total premiums divided evenlyPayouts are not a simple even division of premiums.

Why: After annuitization the annuity-unit count is fixed while the payment varies with separate-account performance relative to the assumed interest rate (AIR).

Delia Marchetti purchases a deferred variable annuity and pays an additional annual charge for a GUARANTEED MINIMUM WITHDRAWAL BENEFIT rider. What does that rider give her?

1. A.A waiver of the contract's surrender charges in any year in which the separate account declines in value.Wrong. Surrender charge waivers are a different contract feature and are typically tied to events such as death, disability or nursing home confinement.
2. B.A contractual floor on the amount she may withdraw each year for a stated period, regardless of separate account performance, in exchange for an additional charge.Correct. A guaranteed minimum withdrawal benefit protects the withdrawal stream, backed by the insurer's general account.
3. C.A guarantee that the subaccounts within the separate account will earn at least the contract's assumed interest rate.Wrong. No rider guarantees separate account investment performance, and the assumed interest rate is a payout-phase benchmark, not a floor on returns.
4. D.An increase in the death benefit equal to the cumulative withdrawals she has taken.Wrong. Withdrawals generally REDUCE the death benefit. This describes no rider that exists.

Why: A guaranteed minimum withdrawal benefit is a living benefit rider. For an extra annual charge, the insurer contractually guarantees that the owner may withdraw at least a specified amount each year for a stated number of years, or in some designs for life, even if poor separate account performance would otherwise have exhausted the contract value. The guarantee is an obligation of the insurer's general account, so it depends on the insurer's claims-paying ability. Two practical points: the rider charge reduces net return, and withdrawing more than the guaranteed amount in a year can reduce or forfeit the guarantee.