SIE Ready🧺 Packaged Products · Lesson 6 of 7 · 6 min
Variable Annuities: Units, AIR and Rule 2330
☂️ A variable annuity is part insurance contract, part investment portfolio, which is why it needs both an insurance license and a securities registration to sell.
💡 Key idea
Accumulation units while saving, annuity units while receiving. Beat the AIR and the payment goes up; miss it and the payment goes down.
🧠 Why it matters
A VARIABLE ANNUITY is an insurance contract whose value rides on investment options (subaccounts) held in the insurer's SEPARATE ACCOUNT; the investor bears the investment risk. During ACCUMULATION, payments buy ACCUMULATION UNITS and growth is tax-deferred. At ANNUITIZATION, the value converts to a fixed number of ANNUITY UNITS whose value changes. Each payment is compared to the ASSUMED INTEREST RATE (AIR): if the separate account returns more than the AIR, the next payment rises; equal, stays the same; less, falls. Example: AIR 4%, actual 6% → payment up. Costs include mortality and expense fees and declining SURRENDER CHARGES. Gains are taxed as ordinary income when withdrawn (10% penalty possible before 59½). FINRA Rule 2330 governs deferred VA recommendations and exchanges.
📈 In the real world
📞 Ruth, 72, receives monthly variable annuity payments. Her AIR is 5%. Last month the subaccounts returned the equivalent of 3%, and her check shrank. She calls, worried. The rep explains: the number of annuity units she owns never changes, but each unit's value follows the account versus the AIR.
📌 Takeaways
- Separate account; investor bears investment risk; tax-deferred growth
- Annuity units are fixed in number; payment rises or falls versus the AIR
- Rule 2330: principal review within 7 business days; scrutiny of exchanges
📖 Terms in this lesson
Variable annuity: An insurance contract whose value rides on separate account investments, offering tax-deferred growth and lifetime income options.
Separate account: The insurer's account, kept apart from its general assets, that holds a variable annuity's investments.
Accumulation unit: The measure of an owner's share of a variable annuity's separate account before payments begin.
Assumed interest rate (AIR): The benchmark return a variable annuity's payments are measured against: beat it and payments rise, fall short and they drop.
✅ Test yourself
An annuitant's AIR is 4%. The separate account earns 4% this period. The next payment will:
- Convert to a fixed payment
- Rise above the prior payment
- Fall below the prior payment
- Stay the same as the prior payment
Answer: D · Stay the same as the prior payment
Payments change only relative to the AIR. If actual returns equal the AIR, the payment stays the same. Returns above the AIR raise it and below the AIR lower it; the contract does not switch to fixed payments.
During the accumulation phase of a variable annuity, the investor's purchase payments buy:
- Units of the general account
- Annuity units
- Accumulation units
- Shares of the insurer's stock
Answer: C · Accumulation units
Payments in the accumulation phase buy accumulation units of the separate account. Annuity units are used only after annuitization, and the general account backs fixed products, not variable subaccounts.
Under FINRA Rule 2330, a principal must review a deferred variable annuity application within how long after the office of supervisory jurisdiction receives a complete package?
- Thirty calendar days
- Seven business days
- Before the free-look period ends
- Three business days
Answer: B · Seven business days
Rule 2330(c) requires principal review no later than seven business days after the OSJ receives a complete and correct application package. The other time frames are not in the rule.
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