When payouts begin, accumulation units are converted into annuity units. What is the correct description of this step?

• A. They are redeemed for cash
• B. They are terminated
• C. They remain accumulation units
• D. They are converted to annuity units

Answer: (D)

When payouts begin, the value built up in the contract isn’t taken as cash or left as accumulation units. Instead, it is converted into annuity units. This is the step that sets up the income stream: the number of annuity units is determined at the start of the payout phase, and ongoing payments are then calculated based on that fixed number of annuity units times the current value of an annuity unit. The annuity unit value can change with the performance of the underlying investments, so payments may go up or down over time, even though the number of annuity units stays the same. In short, this conversion is what transforms accumulated value into a stream of periodic payments, rather than cashing out or preserving the accumulation units.