A variable annuity is characterized by which of the following?

A variable annuity is characterized by underlying equity investments, which is why the chosen answer is correct. Unlike fixed annuities that provide a guaranteed interest rate and fixed payouts, variable annuities allow the policyholder to allocate funds among various investment options, typically including stocks, bonds, and mutual funds. The value of the annuity is subject to the performance of these underlying investments, which means the payouts can vary based on market fluctuations.

This investment flexibility is a crucial feature of variable annuities, as it allows individuals to potentially achieve higher returns compared to fixed-rate products. However, because these returns are tied to market performance, they come with greater risk, which distinguishes them from annuities that offer guaranteed returns or fixed interest rates.