Variable Annuity Payouts: Relationship Between Investment Return and AIR
A retired investor annuitizes a variable annuity contract with an Assumed Interest Rate (AIR) of 4%. In January, the separate account achieves an annualized investment return of 6%. In February, the separate account achieves an annualized return of 4%. In March, the separate account achieves an annualized return of 2%. What happens to the investor's monthly payout in February and March compared to the previous month's check?
If Return > AIR, check increases. If Return = AIR, check stays the same as previous month. If Return < AIR, check decreases. (Feb = AIR -> same; Mar < AIR -> decreases).
Complete Analysis & Legal Rationale
The Assumed Interest Rate (AIR) is a benchmark, not a guaranteed return: (1) When separate account performance EXCEEDS the AIR (Jan: 6% > 4%), the next payout increases; (2) When performance EQUALS the AIR (Feb: 4% = 4%), the payout remains exactly the SAME as the previous month; (3) When performance is LESS than the AIR (Mar: 2% < 4%), the payout DECREASES compared to the previous month. Notice that in March, even though the return was positive (+2%), the check dropped because 2% was below the 4% AIR benchmark.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
If Return > AIR, check increases. If Return = AIR, check stays the same as previous month. If Return < AIR, check decreases. (Feb = AIR -> same; Mar < AIR -> decreases).
Fails to adhere to packaged product rules for B.
Fails to adhere to packaged product rules for C.
Fails to adhere to packaged product rules for D.
Official Standard: The Assumed Interest Rate (AIR) is a benchmark, not a guaranteed return: (1) When separate account performance EXCEEDS the AIR (Jan: 6% > 4%), the nex