Fixed Annuity

An agent reviews four holdings a new client already owns. Under the Uniform Securities Act, which one is NOT a security?

1. A.Common stock of a privately held corporationThis is a security. Stock is a security whether or not the issuer is publicly traded.
2. B.A fixed annuity contract issued by an insurance companyCorrect - this is NOT a security. The insurer guarantees the return and bears the investment risk, making it an insurance product regulated by the state insurance department.
3. C.A variable annuity contract funded through a separate accountThis is a security. The contract owner bears the investment risk of the separate account's performance.
4. D.A certificate of interest in an oil and gas drilling programThis is a security. Fractional interests in oil, gas, or mining titles are expressly named in the definition.

Why: A fixed annuity is not a security. The insurance company guarantees a stated rate of return and bears the investment risk itself, so the purchaser is buying an insurance product rather than taking on investment risk. Fixed annuities are regulated by state insurance departments. By contrast, variable annuities are securities, because the contract owner bears the investment risk of a separate account. Stock and certificates of interest in an oil and gas program are both squarely within the definition. The clue is the word fixed. Review the topic on the definition of a security.

A client wanting principal protection with modest growth is suited to:

1. A.A fixed annuity or conservative allocationCorrect - safety with limited growth.
2. B.A leveraged ETFLeverage multiplies losses just as it multiplies gains, so principal is exposed rather than protected. The client asked for modest growth on a preserved base, which is the opposite risk profile.
3. C.A single small-cap stockOne small company can lose most of its value without warning, and nothing in a single equity position protects the amount invested. Principal protection requires either a guarantee or broad diversification with a conservative allocation.
4. D.An aggressive growth fundThe word growth appears in both the objective and this choice, which is the trap. Modest growth with the principal protected is a conservative mandate, while an aggressive growth fund accepts large drawdowns in pursuit of maximum appreciation.

Why: A fixed annuity or a conservative allocation preserves principal while allowing modest growth.

Which of the following products is NOT a security?

1. A.A variable annuityVariable annuity values ride on securities held in a separate account, and the investor bears the risk — so it is a security.
2. B.A fixed annuityCorrect — the insurer guarantees the payout and bears the investment risk, making it an insurance product, not a security.
3. C.A mutual fund shareMutual fund shares are registered investment company securities — among the most common securities retail investors own.
4. D.A corporate bondA bond is a debt security — the investor lends money and bears credit and interest-rate risk.

Why: A fixed annuity guarantees the investor a stated return, with the insurance company bearing the investment risk — that makes it an insurance product, not a security. The other three all place investment risk on the investor.

In which of the following products does the insurance company bear the investment risk?

1. A.A variable annuityThe annuitant bears the risk in a variable annuity.
2. B.Variable life insuranceThe policyholder bears the investment risk through the separate account.
3. C.A mutual fundMutual fund investors bear the full investment risk themselves.
4. D.A fixed annuityCorrect — the insurer guarantees the result and carries the risk.

Why: In a fixed annuity, the insurer guarantees the return and payout and therefore bears the investment risk. In variable products the investor bears it.