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THE ASSUMED INTEREST RATE (AIR)

When an investor annuitizes a contract, the accumulation units are traded for annuity units. Once the contract has been annuitized, the insurance company sets a benchmark for the separate account's performance, known as the assumed interest rate (AIR). The AIR is not a guaranteed rate of return; it is only used to adjust the value of the annuity units up or down based on the actual performance of the separate account. The AIR is an earnings target that the insurance company sets for the separate account. The separate account must meet this earnings target in order to keep the annuitant's payments at the same level. As the value of the annuity unit changes, so does the amount of the payment that is received by the investor. If the separate account outperforms the AIR, an investor would expect his or her payments to increase. If the separate account's performance falls below the AIR, the investor can expect his or her payments to decrease. The separate account's performance is always measured against the AIR, never against the previous month's performance. An investor's annuity payment is based on the number of annuity units owned by the investor multiplied by the value of the annuity unit. When the performance of the separate account equals the AIR, the value of the annuity unit will remain unchanged, and so will the investor's payment. Selecting an AIR that is realistic is important. If the AIR is too high and the separate account's return cannot equal the assumed rate, the value of the annuity unit will continue to fall, and so will the investor's payment. The opposite is true if the AIR is set too low. As the separate account outperforms the AIR, the value of the annuity unit will continue to rise, and so will the investor's payment. The AIR is only relevant during the payout phase of the contract when the investor is receiving payments and owns annuity units. The AIR does not concern itself with accumulation units during the accumulation stage or when benefits are being deferred.

 
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