Variable vs. Fixed Annuities
Insurance contracts for retirement income: a fixed annuity guarantees payments from the insurer's general account (insurance product, not a security); a variable annuity invests in separate-account subaccounts, so payments fluctuate — making it a security requiring registration and a prospectus.
The exam loves the “which license / which regulator” stem. A variable annuity is dual-regulated: its separate account is registered under the Investment Company Act of 1940 (structured as a UIT or open-end management company), so the seller needs a securities registration plus a state insurance license. A fixed annuity is not a security — only the insurance license is required, and the state insurance commissioner (not the SEC or FINRA) regulates it. The classic trap pairs each product with its risk: the fixed payment carries inflation (purchasing-power) risk, while the variable shifts investment risk to the owner.
Watch the AIR tell: payouts rise only when separate-account performance exceeds the assumed rate, fall when it lags, and stay level when it exactly matches — students wrongly read “any positive return” as “bigger check.” Two compare-points: unlike a taxable mutual fund position, an annuity gets no stepped-up basis at death (heirs owe ordinary income on the gain); and unlike a UIT’s fixed termination date, an annuity can be annuitized to pay for life.
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