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VARIABLE ANNUITY

An investor seeking to achieve a higher rate of return may elect to purchase a variable annuity. Variable annuities seek to obtain a higher rate of return by investing in stocks, bonds, or mutual fund shares. These securities traditionally offer higher rates of return than more conservative investments. A variable annuity does not offer the investor a guaranteed rate of return and the investor may lose all or part of their principal. Because the annuitant bears the investment risk associated with a variable annuity, the contract is considered both a security and an insurance product. Representatives who sell variable annuities must have both their securities license and their insurance license. The money and securities contained in a variable annuity contract are held in the insurance company's separate account. The separate account is named as such because the variable annuity's portfolio must be kept separate from the insurance company's general funds. The insurance company must have a net worth of $1,000,000 or the separate account must have a net worth of $1,000,000 in order for the separate account to begin operating. Once the separate account begins operations, it may invest in one of two ways.

• Directly

• Indirectly

DIRECT INVESTMENT

If the money in the separate account is invested directly into individual stocks and bonds, the separate account must have an investment adviser to actively manage the portfolio. If the money in the separate account is actively managed and invested directly, then the separate account is considered an open-end investment company under the Investment Company Act of 1940 and must register as such.

INDIRECT INVESTMENT

If the separate account uses the money in the portfolio to purchase mutual fund shares, it is investing in the equity and debt markets indirectly, and an investment adviser is not required to actively manage the portfolio. If the separate account purchases mutual fund shares directly, then the separate account is considered a unit investment trust (UIT) under the Investment Company Act of 1940 and must register as such.

 
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