Series 7 practice questionhardPackaged Products — Variable Annuities
A variable annuity has an assumed interest rate (AIR) of 4%. If the separate account earned 6% in the first month and 4% in the second month, what happens to the annuity payments?
- APayments increase in month 1 and increase again in month 2
- BPayments decrease in both months
- CPayments remain the same in month 1 and decrease in month 2
- DPayments increase in month 1 and remain the same in month 2✓ Correct answer
Explanation
Why D — Payments increase in month 1 and remain the same in month 2
When the separate account return (6%) exceeds the AIR (4%), the annuity payment increases. When the return equals the AIR (4% = 4%), the payment stays the same as the prior period. Payments only decrease when the actual return falls below the AIR. The AIR is used as the benchmark against which performance is measured to determine payment adjustments.
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