If an annuity uses units instead of dollars to determine the value of the policy, then it is a(n) _________ annuity.

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

Answer: (B)

When an annuity’s value is determined by accumulation units rather than straight dollars, you’re looking at a variable annuity. In this type, money is placed into separate investment accounts, and the contract’s accumulation value is calculated by multiplying the number of accumulation units owned by the current unit value. The number of units purchased is tied to your premium, but the unit price moves up or down based on the investment performance. So the overall value, and future income, can rise or fall with market returns, unlike fixed annuities that guarantee a specific dollar amount.

Fixed annuities guarantee a stated dollar value or rate, so the value isn’t driven by investment performance. Indexed annuities link returns to a market index but still present the value in dollars with caps or participation rates. Immediate annuities concern when payments begin, not how the value is measured.