What risks are associated with variable annuities?

Variable annuities carry inherent risks primarily related to the performance of the investment options chosen by the policyholder. One of the key risks involved is market risk, which refers to the possibility that the value of the underlying investments will fluctuate due to changes in market conditions. This is particularly relevant for variable annuities since they are often linked to mutual funds or other investment portfolios that can rise or fall in value.

In addition to market risk, interest rate risk is also pertinent. Interest rate risk arises from the potential for changes in interest rates to impact the value of fixed-income investments within the annuity. As interest rates rise, the market value of existing bonds typically falls and vice versa. This dual exposure to both market and interest rate fluctuations makes option B the most comprehensive choice regarding the associated risks of variable annuities.

By understanding these risks, investors can better assess their risk tolerance and make informed decisions about whether a variable annuity suits their financial strategy.