Tennessee Life Producer Practice Exam

What type of annuity has its cash value tied to the performance of its underlying investment funds?

1. Fixed annuity

2. Deferred annuity

3. Variable annuity

4. Immediate annuity

The correct answer is: Variable annuity

The correct choice is a variable annuity because its cash value is directly linked to the performance of the selected underlying investment options, which may include stocks, bonds, or mutual funds. This means that as these investments perform well, the cash value of the annuity can increase accordingly. Conversely, if the investments perform poorly, the cash value may decrease. Variable annuities provide the potential for growth but also come with investment risk, as the account holder may experience fluctuations in value depending on how the chosen investments perform. This characteristic distinguishes variable annuities from fixed annuities, which offer guaranteed returns and do not fluctuate based on market performance. Deferred and immediate annuities describe the timing of when the annuity payments start, rather than the relationship between cash value and investment performance.