How does market volatility affect variable annuities?

Variable annuities are investment products that include a range of underlying assets, such as mutual funds, whose values fluctuate with market conditions. Market volatility refers to the up-and-down movements in the market, which can directly impact the performance of these underlying investments. When the market is volatile, the values of the investments within the variable annuity can significantly increase or decrease.

The performance of the underlying investments is critical for the policyholder because it affects the account value, potential growth, and any benefits tied to the investment performance. For instance, in times of high volatility, a policyholder may experience substantial gains if the market trends upward, or they may face losses if it trends downward. Thus, understanding the influence of market volatility on variable annuities is essential for making informed decisions about these products.

While other options mention aspects related to annuities, like guaranteed benefits or expense risks, they do not correctly address how volatility affects the intrinsic nature of variable annuities as investment vehicles. Only the impact on the performance of the underlying investments aligns with the characteristics and risks associated with variable annuities.