Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

What is a variable annuity?

1. A type of bond with variable interest rates

2. A contract under which an investor pays for future periodic payments

3. A fixed-rate insurance policy

4. An investment fund with a set maturity date

The correct answer is: A contract under which an investor pays for future periodic payments

A variable annuity is indeed a contract through which an investor pays into the annuity with the expectation of receiving future periodic payments, which can be made during the accumulation phase or upon retirement. This financial product typically allows the investor to allocate funds among various investment options, which may include stocks, bonds, or mutual funds. The payments received from the annuity can fluctuate based on the performance of the investments chosen, hence the term "variable." The nature of variable annuities emphasizes their purpose as a long-term retirement savings vehicle, blending investment and insurance elements. Investors benefit from the potential growth of their investment, but they also assume the risk that the value could decrease due to market performance. In contrast, the other options misrepresent the characteristics of a variable annuity. For example, classifying it as a type of bond or a fixed-rate insurance policy does not encapsulate the annuity's variability and investment elements. Similarly, describing it as an investment fund with a set maturity date neglects the ongoing payment feature that is central to the concept of an annuity. Thus, framing variable annuities clearly reflects their intricate design as vehicles for long-term investment and income generation.