Final answer:
When paying premiums for a variable annuity, the purchaser is credited with annuity units, which are linked to the performance of an underlying investment portfolio. This differs from savings accounts and bonds, which offer interest, or stocks that may provide dividends. Annuities present a safer, though potentially less lucrative, investment choice for retirement savings. Option C is correct.
Step-by-step explanation:
Prior to retirement, the purchaser of a variable annuity pays an agreed-upon periodic premium amount. When these periodic premiums are paid, the purchaser is credited with annuity units. Unlike savings accounts or bonds which offer interest, or stocks which may pay dividends, variable annuities provide annuity units. These units are linked to the performance of an underlying investment portfolio, typically consisting of various funds that can include stocks, bonds, and other securities, which offers a way for retirees to potentially grow their funds.
As the value of these underlying investments fluctuates, so too does the number of annuity units that a premium payment will purchase. When the time comes to retire, the number of accumulated annuity units is used to calculate the amount of periodic payments the retiree will receive.
It's important to consider the private market options available for saving for old age. Individuals have various alternatives, such as investing in property, stocks, bonds, or annuities, all of which come with different levels of risk and potential for returns. Annuities are generally considered a safer investment with less volatility, but different investment vehicles can be more appropriate depending on individual financial goals and risk tolerance.