A(n) _ annuity pays benefits based on units rather than stated dollar amounts:
A deferred
B variable
C immediate
D unit
The Correct Answer and Explanation is :
The correct answer is B) variable.
A variable annuity is a type of annuity that pays benefits based on units rather than fixed dollar amounts. These units are tied to the performance of underlying investment options, such as mutual funds or other securities. As the value of these investments fluctuates, the number of units and the value of the annuity payments can increase or decrease accordingly. This is in contrast to a fixed annuity, which guarantees a set dollar amount of payments over time.
In a variable annuity, the purchaser typically chooses from a selection of investment options, and the annuity’s value grows or shrinks based on the performance of these investments. This offers potential for greater returns, but also introduces a level of risk, as the annuity holder’s payments can decrease if the investments perform poorly.
Unlike a deferred annuity, which begins payments at a later time (such as in retirement), a variable annuity can be structured either as immediate or deferred, depending on when payments begin. Immediate annuities, on the other hand, begin payments almost immediately after a lump-sum payment is made, while unit annuities (which are a type of variable annuity) specify that payments will be based on the accumulation of units tied to the performance of underlying investments.
The main advantage of a variable annuity is the opportunity for investment growth, but it comes with the risk that payments may not be predictable, as they depend on the market’s performance. This makes it essential for investors to carefully consider their investment choices and risk tolerance when opting for a variable annuity.
In summary, a variable annuity pays benefits based on units, which can fluctuate in value depending on the performance of the selected investments.