Characteristics, Uses and Taxation of Investments - Sub Accounts



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. Professionals

    Valuation of Variable Annuities

    FINRA Series 6: Section 11 Valuation of Variable Annuities. This section discusses the Accumulation Phase and Annuitization Phase in the valuation of Variable Annuities.
  2. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Annuities

    What they are: Insurance products that provide a source of monthly, quarterly, annual or lump sum income during retirement. Pros: Tax-deferred growth of earnings; no annual contribution limit; ...
  3. Annuities

    What annuities are: Insurance products that provide a source of monthly, quarterly, annual or lump sum income during retirement. Pros: Tax-deferred growth of earnings; no annual contribution ...
  4. Bonds & Fixed Income

    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.
  5. Retirement

    Buying Annuities in a Low Interest Rate World

    Learn if buying an annuity makes sense in a low interest rate environment. Also discover the different types of annuities and how interest rates affect them.
  6. Professionals

    Features of Variable Annuities

    FINRA/NASAA Series 26 Section 3 - Features of Variable Annuities. Important features of variable annuities: tax-deferred returns, separate and sub accounts and death benefits.
  7. Professionals

    Features of Variable Annuities

    FINRA Series 6: Section 11 Features of Variable Annuities. Tax-Deferred Returns, Separate Account, Sub-Account, Death Benefit, Stepped-up Death Benefit are some important features of Variable ...
  8. Professionals

    Types and Valuation of Variable Annuities

    FINRA/NASAA Series 26 Section 3 - Types and Valuation of Variable Annuities. This section discusses immidiate and deferred annuities, and the accumulation and annuitization phases.
  9. Retirement

    Introduction To Annuities: Basics of Annuities

    In the introduction, we learned about the history and purpose of annuities. In this section, we will explore the mechanics of these contracts and the basic characteristics that apply to all forms ...
  10. 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.
RELATED TERMS
  1. Assumed Interest Rate - AIR

    The rate of interest, or growth rate, selected by an insurance ...
  2. Income Annuity

    Annuities designed to start paying income as soon as the policy ...
  3. Variable Annuitization

    An annuity option in which the amount of income payments received ...
  4. Mortality And Expense Risk Charge

    A variable annuity fee included in certain annuity or insurance ...
  5. Annuitization

    The process of converting an annuity investment into a series ...
  6. Whole Life Annuity Due

    A financial product sold by insurance companies that requires ...
RELATED FAQS
  1. What are the main kinds of annuities?

    Learn about the four basic types of annuities, and why the different investment and payout options are suitable for different ... Read Answer >>
  2. The Shur-Gro variable annuity uses an AIR of 3% for those contract holders who are ...

    The correct answer is b. Any time the actual growth rate of the separate account exceeds the account’s AIR, the payment will ... Read Answer >>
  3. What is the difference between a fixed and variable annuity?

    Understand the difference between fixed, variable and indexed annuities, and read a brief summary of their respective risks ... Read Answer >>
  4. In the separate account of a variable annuity, which of the following characteristics ...

    The correct answer is b. When the holder of a variable annuity contract annuitizes the contract, he/she is asking that the ... Read Answer >>
  5. Are variable annuities a good retirement investment?

    Discover the basics of variable annuities, the positive and negative aspects associated with them, and who is best suited ... Read Answer >>
  6. How are variable annuities taxed at death?

    Find out how variable annuities are taxed after the death of an annuitant, including an explanation of the various payment ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center