Colorado Life Producer License Practice Test

Which is a feature of variable annuities?

1. Guaranteed payments

2. Investment in separate accounts

3. Immediate cash value

4. Fixed premium payments

The correct answer is: Investment in separate accounts

Variable annuities are designed specifically to allow for investment in separate accounts, which are similar to mutual funds. This feature enables the policyholder to allocate their premiums among a range of investment options, effectively tying the value of the annuity to the performance of those underlying investments. As the investments perform well, the value of the annuity can increase, which provides the potential for growth but also involves risk, as poor investment performance could decrease the value. This flexibility and potential for growth is a key characteristic of variable annuities, distinguishing them from fixed annuities, which do not have this investment feature. The ability to choose separate accounts means that individuals can tailor their investment strategies according to their risk tolerance and financial goals, which is a central appeal of variable annuities for many investors.