Indiana State Life and Health Insurance Practice Exam

What type of annuity has a cash value that is based upon the performance of its underlying investment funds?

1. Deferred

2. Flexible

3. Variable

4. Fixed

The correct answer is: Variable

The type of annuity that has a cash value based on the performance of its underlying investment funds is a variable annuity. In a variable annuity, the policyholder has the ability to allocate their premiums among a variety of investment options, typically mutual funds. The cash value, as well as the potential income during retirement, fluctuates according to the performance of those investments. This means that if the investments perform well, the cash value and payouts can increase; conversely, if the investments do poorly, the cash value can decrease. This feature differentiates variable annuities from fixed annuities, which provide guaranteed payouts based on a fixed interest rate and do not fluctuate based on market performance. Flexible annuities relate more to the premium payment structure rather than the cash value itself, allowing policyholders to adjust their premium payments. Deferred annuities refer to the timing of payouts, which are postponed until a later date but do not inherently imply performance-based cash value. Thus, the distinguishing characteristic of variable annuities is their connection to the performance of investment funds, making this the correct answer.