What is the primary shift in investment risk associated with variable annuities?

In the context of variable annuities, the primary shift in investment risk occurs because the investment risks are transferred to the insured. This means that unlike traditional fixed annuities where the insurer typically bears the investment risk and guarantees a minimum return, variable annuities allow the policyholder to choose investment options from a range of portfolios, such as stocks and bonds.

As a result, the performance of these investments directly impacts the value of the annuity and any payouts received upon annuitization or withdrawal. If the selected investments perform well, the insured may benefit from substantial growth; however, if they perform poorly, the insured assumes the risk of potentially lower returns or even loss of principal. This transfer of investment responsibility underscores the main characteristic of variable annuities—the policyholder engages actively with their investment choices, taking on the associated risks and rewards.

This structure encourages policyholders to be more involved in their investment decisions and aligns their interests more closely with market performance.