Variable Annuities

Question 1

Annuity

Answer 1

An Annuity is an agreement between an insurance company and an individual.

Question 2

Fixed Annuity

Answer 2

Guarantees the investor the rate of return. Considered an insurance product not a security because there is no risk involved. Invests in very safe securities such as real estate and mortgages. Representatives who sell these must have insurance licenses.

Question 3

Variable Annuity

Answer 3

Invests in stocks, bonds or mutual fund shares and acheives a higher rate of return than a conservative investment. There is no guarantee and because of this a variable annuity is considered both an insurance product and a security. Representatives who sell these must have insurance and securities license. Must have $1,000,000 in a general account and $1,000,000 in a separate account in order for the annuity to begin operating. Once it begins operating investment may be 1 of 2 ways. Direct and Indirect.

Question 4

Combination Annuity

Answer 4

A combination of both fixed and variable annuities for a mix of both risky and safe investments. The investor can usually move funds between the two types of annuities depending on their risk appetite.

Question 5

Direct Investment

Answer 5

If the money in a variable annuity separate account is directly invested in stocks, bonds and must be actively managed by an investment adviser. Therefore it is considered an open-end investment company and must register as such.

Question 6

Indirect Investment

Answer 6

If the money in a variable annuity separate account is invested in mutual fund shares it is not required to be actively managed by an investment manager. In this case it is considered a unit investment trust and must register as such.

Question 7

Bonus Annuity

Answer 7

Offered by companies to investors who purchase their variable annuities.

Question 8

Premium Enhancement

Answer 8

A bonus offered to investors purchasing variable annuities. The insurance company will make an additional contribution equal to a certain % of the annuitants based on the premium they pay.

Question 9

Equity Indexed Annuity

Answer 9

Offer investors a return that varies according the performance of a certain index such as the S&P 500. Usually combine the guarantee return of a fixed annuity with the growth of a variable annuity.