Tennessee Life Producer Practice Exam

Which statement accurately describes a characteristic of a variable annuity?

1. It guarantees fixed returns regardless of market conditions

2. It has a mandated surrender period of 10 years

3. Its cash value is variable based on investment performance

4. It does not provide for a death benefit

The correct answer is: Its cash value is variable based on investment performance

A variable annuity is designed to provide returns that can fluctuate based on the performance of the underlying investments selected by the annuity holder. Unlike fixed annuities, which offer guaranteed returns, variable annuities allow the policyholder to potentially benefit from market gains, but also expose them to market risks. As a result, the cash value of a variable annuity can rise or fall depending on how well the invested accounts perform. This characteristic is inherent to the structure of variable annuities, making option C the correct description. In contrast, other options misrepresent the nature of variable annuities. For example, fixed returns regardless of market conditions refer to fixed annuities, while a mandated surrender period of 10 years is not a universal characteristic and can vary by contract. Additionally, variable annuities typically do provide a death benefit, ensuring that beneficiaries receive compensation upon the annuity holder's passing, which is contrary to the implication of the last statement.