7.3.5 Investment Configuration
The investment configuration of an annuity can produce either a guaranteed rate of return or a rate of return that is not guaranteed.
Though there is a wide range of annuities with various options and features, all annuities may be divided into the following two basic types.
- Fixed annuities - A type of annuity that provides a guaranteed fixed benefit amount, payable for the life of the annuitant.
- Variable annuities - Payments fluctuate according to the value of an account invested primarily in common stocks.
Why are common stocks and other equity investments used in the investment portfolio underlying variable annuities?
The basic tenet of the investment base of variable annuities is that as common stock price levels fluctuate with general price levels, the annuity payments, which are determined by the common stock performance, will provide an effective long-run inflation hedge.
