General Account

Hollowbrook Mutual Life issues both a traditional fixed annuity and a variable annuity. Which statement correctly describes where the assets supporting each contract are held?

1. A.Both contracts are supported by the general account, and the variable contract simply credits a rate linked to an index.Wrong. That describes an indexed annuity, whose assets do stay in the general account because the insurer still carries the downside.
2. B.The fixed contract is supported by the general account, while the variable contract premiums go into a separate account.Correct. The party carrying the investment risk determines where the money sits, and only the fixed contract puts that risk on the insurer.
3. C.Both contracts are supported by a separate account, which is what allows each of them to carry a guaranteed minimum rate.Wrong. A minimum crediting rate can only be promised out of general account assets; a segregated account makes no such promise.
4. D.The fixed contract uses a separate account so that its guarantee is insulated from the other obligations of the insurer.Wrong. It reverses the arrangement, because the fixed guarantee is itself one of the general account obligations of the insurer.

Why: Where an insurer holds the assets follows directly from who bears the investment risk. A fixed annuity promises a declared rate that can never fall below the contract minimum, so the insurer must absorb any shortfall and keeps those assets in its general account alongside its other liabilities. A variable annuity passes investment results straight through to the owner, so premiums go into a segregated separate account whose value rises and falls with the subaccounts. If the variable contract were rewritten to guarantee the account value, those assets would have to move back to the general account to support the promise.

The reference index for an indexed annuity issued by Thackeray Life falls over the contract year. Ignoring any rider charge, the interest credited to the contract for that year is

1. A.negative, in proportion to the index decline multiplied by the participation rate of the contract.Wrong. The participation rate scales gains only, and applying it downward would contradict the contractual floor.
2. B.zero, because the guaranteed floor in the contract prevents any negative credit for the period.Correct. A general account product cannot pass an index loss to the owner, so the formula bottoms out at zero.
3. C.zero, but the insurer may recover the shortfall out of the credit for the following contract year.Wrong. There is no carry-forward of a bad year; each crediting period is measured independently.
4. D.equal to the declared fixed rate, which replaces the index credit whenever the index falls.Wrong. The floor sets a minimum index credit of zero, not a substitute fixed rate for down years.

Why: An indexed annuity is a general account product, so the insurer absorbs index declines and the owner never receives a negative credit. In a down year the crediting formula simply produces zero and the contract value stands still, protected by the guaranteed floor written into the contract. The participation rate and the cap operate only on an index gain; they scale upside and have no role when the index falls. If the owner were instead in a variable subaccount or an index-linked contract that passes losses through, the account value would decline with the market.

Variable universal life differs from scheduled-premium variable life principally in that variable universal life

1. A.invests premium in a separate account, while scheduled-premium variable life uses the general account.Wrong. Separate account funding is what makes each of them variable, so both contracts share it.
2. B.permits the owner to vary the amount and timing of premium, subject to covering monthly charges.Correct. Premium flexibility is the universal life element grafted onto a separate account contract.
3. C.carries a guaranteed minimum cash value that scheduled-premium variable life does not provide.Wrong. Neither contract floors the cash value, because both hand the investment result to the owner.
4. D.falls outside the definition of a security, because its premium payments are flexible.Wrong. Both are securities, and how the premium is scheduled has no bearing on that classification.

Why: Both contracts are securities and both invest premium in a separate account, so neither of those features distinguishes them. What variable universal life adds is the universal life premium structure: the owner chooses how much to pay and when, so long as the policy value can cover the monthly cost of insurance and expense charges. Scheduled-premium variable life fixes the premium as a whole life contract does. Neither contract guarantees a cash value, because in both the owner takes the separate account result directly.

Comparing a whole life policy with a variable life policy issued by the same insurer to the same insured, the cash value of the variable policy

1. A.is guaranteed to grow at no less than the minimum rate stated in the contract, as in whole life.Wrong. A minimum crediting rate is a general account feature and does not travel with the policy into a separate account.
2. B.is guaranteed, while it is the death benefit that fluctuates with the performance of the subaccounts.Wrong. It reverses the design, since the minimum death benefit is the guaranteed element and the cash value is not.
3. C.fluctuates with subaccount performance and carries no guaranteed floor of any kind.Correct. Separate account placement hands the investment result to the owner, and a floor would contradict that.
4. D.is protected from falling below the total of the premiums the owner has paid into the policy.Wrong. No return-of-premium floor applies here, and inventing one would recreate the guarantee the design removes.

Why: The guaranteed minimum cash value in a whole life contract exists because the general account of the insurer stands behind it. A variable life policy moves the cash value into the separate account, where the owner takes the investment result directly, so no floor comes with it and the cash value can decline in a poor market. What the variable contract does keep is a guaranteed minimum death benefit, which the insurer supports from its general account. The design is therefore the mirror image of what many candidates expect: the death benefit is floored and the cash value is not.