6.2 Variable Annuities
Variable annuities hedge against inflation by investing premiums into separate account equity subaccounts. Understanding the Assumed Interest Rate (AIR) calculation mechanics is tested on nearly every Series 7 exam.
Key FINRA Exam Takeaways
- Separate Account is registered under the Investment Company Act of 1940 as a Unit Investment Trust or Open-End company.
- Assumed Interest Rate (AIR): Conservative benchmark rate used to calculate monthly annuity payments.
- Payment comparison rule: If actual separate account return > AIR, next month's payment INCREASES. If return = AIR, payment REMAINS SAME. If return < AIR, payment DECREASES.
- Mortality and Expense (M&E) Risk Charges: Assessed to guarantee lifetime payouts regardless of how long the investor lives.
Assumed Interest Rate (AIR) Mechanics
AIR is NOT a guaranteed minimum return! It is simply an actuarial projection benchmark. If AIR is 4%: If separate account earns 6% (above AIR), check increases. If separate account earns 4% (equal to AIR), check stays same. If separate account earns 2% (positive return, but below AIR), the check DECREASES!
An annuitant receives a $1,200 monthly payout from a variable annuity with an Assumed Interest Rate (AIR) of 4%. During the following month, the performance of the separate account subaccounts is +2%. What will happen to the annuitant's next monthly payment?