Generally, which of the following annuities is not designed to guarantee the principal value of the policy in stable interest rate environments?

• A. Fixed
• B. Variable
• C. Indexed
• D. Immediate

Answer: (B)

Focus on whether the contract protects the original premium. Fixed annuities back the guaranteed principal with a fixed rate, so the accumulation value is protected even when rates are stable. Indexed annuities also protect the principal and credit interest based on an index, subject to caps or floors. An immediate annuity isn’t about building up an accumulation value to protect principal; it converts the premium into a stream of payments. The variable annuity, however, funds the contract from investment accounts that move with market performance, so there’s no guarantee that the principal value will be preserved in a stable-rate environment unless a separate guarantee rider is added. That is why the variable annuity is the one not designed to guarantee principal value by default.