What effect does a separate account growing at a rate of 12% have on a variable annuity with an AIR of 4%?

In a variable annuity, the actual payments that an annuitant receives are influenced by the performance of the underlying investment options. The Assumed Interest Rate (AIR) is a benchmark used to project payments and can affect how variable annuities disburse funds over time.

When the separate account in a variable annuity grows at a rate of 12%, this growth significantly exceeds the AIR of 4%. The performance of the account directly impacts the value of the annuity; therefore, if the account is performing well above the AIR, the annuity payments will increase. Specifically, the monthly payments that the annuitant receives will be adjusted upwards to reflect the higher actual investment returns compared to the assumed benchmark. This mechanism allows the annuitant to benefit from favorable market conditions, thus enhancing their monthly cash flow from the annuity.

As a result, considering the substantial growth of the separate account relative to the AIR, the correct conclusion is that the annuitant's monthly payment will indeed increase.