What is a potential risk associated with variable annuities?

Variable annuities are investment products that can provide both an income stream and a death benefit to policyholders, but they come with inherent risks, particularly related to the performance of the underlying investments. The correct option highlights a significant risk associated with variable annuities: the potential for loss of principal investment.

When individuals invest in a variable annuity, their returns are tied to the performance of the investment options they choose, which typically include stocks, bonds, and other investment vehicles. If these investments perform poorly, the value of the annuity can decrease, leading to a situation where the policyholder might not only fail to achieve their expected returns but also face a loss that exceeds their initial investment.

Understanding this risk is crucial for investors, as it underscores the importance of carefully selecting investment options and having a clear strategy concerning their risk tolerance. This feature distinguishes variable annuities from fixed annuities, which provide a guaranteed return and therefore do not expose investors to the same risk of losing principal.