j.
Sub Accounts
- these are the vehicles which hold the funds that make up the investments in variable annuities and variable life insurance. One may think of sub accounts as mutual funds with an insurance wrapper in the form of a mortality guarantee that enables the annuitant to receive income for life with both the opportunity to generate capital gains as well as the possibility of losing value due to downside volatility, all in a tax deferred environment.

Mutual Funds and Variable Annuities Compared

Mutual Fund Variable Annuity
Sales Charge 8.5% maximum No maximum
Pricing Daily NAV calculation Daily Unit Value calculation
Share Value Function of fund performance Function of Separate Account Performance
Regulated by 1933 Act 1933 Act
1934 Act 1934 Act
Investment Company Act of 1940 Investment Company Act of 1940
Investment Advisors Act of 1940 Investment Advisors Act of 1940
Compensation to manager Portfolio manager receives a fee Separate Account Manager receives a fee
Earnings Accumulation Taxable flow-through of capital gains and dividends to investors, even if reinvested Any distributions increase the value of separate account units
Income Guarantee None Guaranteed Lifetime Income

The Annuitization process: once the client chooses to annuitize, the insurer's actuarial department determines the initial value of the annuity units and the first month's payment amount. Here the assumed interest rate (AIR) is established, a conservative projection of the separate account's performance over the contract's projected life. The annuity unit's value and subsequent monthly income payments to the annuitant vary as a function of the separate account performance compared to the AIR. The month-to-month performance varies according to the following rules.
Separate Account Performance Monthly Income
Greater than AIR Greater than that of previous month
Equal to AIR Same as that of previous month
Less than AIR Less than that of previous month

Month2 Month 3 Month 4 Month 5 Month 6
AIR 4% 4% 4% 4% 4%
Sep. Acct. Return 8% 6% 4% 3% 3%
Monthly Income Increases Increases Unchanged Decreases Decreases


Guaranteed Investment Contracts (GICs)

Related Articles
  1. Retirement

    Explaining Types of Fixed Annuities

    Learn about this popular retirement tool, its pros and cons and how annuities work to create a guaranteed regular stream of retirement income.
  2. Retirement

    Variable Annuities With Living Benefits: Worth The Fees?

    Added features can make a variable annuity suitable for certain investors. Find out if it could work for you.
  3. Retirement

    What Is the Best Age to Get an Annuity?

    Optimizing the benefits of an annuity means guaranteeing a stream of income you can't outlive.
  4. Retirement

    How a Variable Annuity Works After Retirement

    These investments can provide extra income after you retire. Here’s a guide to when and how you will receive the payout.
  5. Financial Advisor

    An Overview of Annuities

    These contracts provide a guaranteed income stream. Learn how they work and their benefits.
  6. Retirement

    How to Use Annuities for Retirement Income

    We explain how to use annuities for guaranteed income in retirement.
  7. Retirement

    Variable Annuities: A Good Retirement Investment?

    Variable annuities provide lifetime payments and tax-deferred growth, but – given their hefty fees – are they right for you?
  8. Retirement

    Managing Annuity Distributions in Retirement

    Strategies to help manage taxable deferred annuity distribution in retirement.
  9. Retirement

    How a Fixed Annuity Works After Retirement

    These popular investments can provide a steady stream of income during your retirement years. Here are the details.
Frequently Asked Questions
  1. Why is social responsibility important to a business?

    Take social responsibility seriously, and your business could benefit from happier, more productive staff members while helping ...
  2. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ...
  3. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  4. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
Trading Center