Which of the following is a risk associated with variable annuities?

Variable annuities are investment products that allow for the accumulation of funds based on the performance of selected investment options, typically mutual funds. A key risk associated with these annuities is the potential loss of principal. This occurs because the value of the investment can fluctuate based on market conditions. If the chosen investment options perform poorly, the account value can decrease, and in some scenarios, the investor may end up with less money than was initially invested.

This risk is particularly significant because, unlike fixed annuities, variable annuities do not guarantee a minimum return on the investment. As a result, investors assume the risk associated with market volatility and changes in underlying investment values, which could lead to a loss of the principal amount they contributed to the annuity.

Other options do not reflect the inherent risks found in variable annuities. Guaranteed income for life, for example, is an attractive feature of certain annuity products designed to mitigate the risk of outliving one’s savings, but it does not represent a risk itself. Similarly, having no market exposure and fixed payment amounts are characteristics associated with fixed annuities rather than variable ones, which precisely involve market risks.