Separate Account

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.

During a variable annuity's pay-in phase, the accumulation unit value reflects:

1. A.A guaranteed fixed rateA guaranteed crediting rate describes a fixed annuity, where the money sits in the insurer's general account and the company bears the investment risk. In a variable contract the owner bears that risk, and the accumulation unit value moves with separate account performance.
2. B.The value of the separate account during accumulationCorrect - units mirror separate-account performance.
3. C.The surrender charge scheduleSurrender charges are a contractual cost schedule applied if the owner withdraws early, and they decline over time on their own terms. They are unrelated to how a unit is valued, which tracks the investment performance of the separate account.
4. D.The death benefit amountThe death benefit does move with contract value during accumulation, so the two are connected and this is the closest wrong answer. The accumulation unit value is narrower: it measures what one unit of the separate account is worth, and the number of units the owner holds is what changes as contributions are made.

Why: Accumulation units track the value of the separate account while the contract owner is contributing.

A subaccount within the separate account of a variable life policy is BEST described as:

1. A.A fixed-interest option whose rate is guaranteed by the insurer general accountThat describes the fixed account many policies also offer. It is guaranteed by the insurer, which is exactly what a subaccount is not.
2. B.A pool of assets managed to a stated investment objective, priced daily in units, that the policyowner selects for cash value allocationCorrect. Subaccounts function like mutual funds inside the separate account, and their unit values move with performance.
3. C.A segregated bank custody account that holds cash to pay the policy death benefitThis confuses the custodian role with the investment vehicle. The death benefit is an insurance obligation, not a set-aside cash account.
4. D.An optional rider that lets the owner add coverage without new underwritingThat is a rider, a contract feature. A subaccount is an investment option, not a coverage add-on.

Why: A subaccount is a pool of assets managed to a stated objective (growth, bond, balanced, and so on). It works much like a mutual fund: your premium dollars buy units, and the unit value is recomputed each business day based on performance. The policyowner chooses which subaccounts to use and bears the investment results. Clue in the stem: the word within tells you a subaccount is one investment choice inside the larger separate account, not a separate contract.

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.