Which type of annuity is based on units rather than specific dollar amounts?

A variable annuity is unique in that it is based on units rather than fixed dollar amounts. This means that the value of the annuity can fluctuate based on the performance of the investments selected by the policyholder. The annuity is divided into accumulation units during the accumulation phase, which represent the investor's share of the total investment. The number of units owned by the policyholder increases or decreases in value according to the performance of the underlying investment options, which can include stocks, bonds, or mutual funds.

This structure allows policyholders to benefit from potential market gains, but they also bear the risk of market losses, making variable annuities inherently more flexible and dynamic compared to fixed or indexed annuities. In a fixed annuity, for example, the returns are guaranteed and based on specific interest rates, while indexed annuities provide returns linked to a stock market index but still maintain some degree of guaranteed returns. Immediate annuities begin payments shortly after a lump-sum payment is made but do not operate on the principle of units based on investment performance.