Question

K owns a variable annuity with an assumed interest rate of 4%. If the actual performance of the separate account(s) is 5%, the effect on this month's income benefit check will be such that it:

Answer 1

Answer:

Since the actual performance of the separate account is actually higher than the assumed interest by 1 %, this means that K will be paid 1% more on the value of his/her annuity account.

Explanation:

An annuity account is a policy holder's investment account where the insurance company invests on behalf of the annuitant. The insurance company determine an assumed interest rate that will cover for the insurance company costs and the profit margin that will be paid to the annuitant periodically.

Annuity interest help investors plan for retirement income since the annuitant knows how much they expect to receive upon maturity of the policy. Knowing how to calculate the value of an annuity can also help investors to consider other investment options.

An assumed interest rate that is determined by the insurance company. This is the value of the annuity account and the annuitant should not be paid below the value of this rate. The actual interest rate is the actual performance of the investment in the market. If this rate increases, then the value of payment to be made to the annuitant also increases.

In our case, the actual performance of the separate account is actually higher than the assumed interest by 1 % this means that K will be paid 1% more on the value of his/her annuity account.