Variable Contracts - Features of Variable Annuities


Variable annuities have several important features:

Tax-Deferred Returns
Payments and returns in the annuity grow tax-deferred. That is, all dividends, interest and capital gains are automatically reinvested without incurring local, state or federal taxes. All earnings are taxed at ordinary income tax rates when withdrawn. Returns compound more quickly without the erosive effects of taxes, and the value of the annuity is allowed to grow at a faster pace.

Separate Account and Sub-Accounts
One of the primary features of a variable annuity is the separate account. By law, this account must be kept separate from the insurance company's general account, so that all dividends, interest, gains and losses are separate and apart from the finances of the insurance company.

  • A separate account is considered a security because it holds securities in a pooled form (similar to mutual funds), unlike the general account of a fixed annuity.
  • Separate accounts are regulated by the same laws set forth in the Securities Act of 1933 and are sold by means of a prospectus.
  • It must also be registered under the Investment Company Act of 1940, since the sub-accounts are similar to mutual funds.

Sub-accounts allow the owner to tailor an asset allocation model for specific investment objectives. The number of sub-account choices and the specific funds will depend on the individual variable annuity contract that the investor chooses.


Exam Tips and Tricks
The exam may test you on the separate account in a variable annuity. Make sure you understand why the separate account is considered a security and must be sold with a prospectus!


Death Benefit
A common feature of variable annuities is the death benefit. If the annuitant dies, the person selected as a beneficiary will receive the greater of (a) all the money in the annuity, or (b) some guaranteed minimum, such as all purchase payments minus prior withdrawals.

  • Stepped-Up Death Benefit:

    • Some variable annuities allow investors to choose a "stepped-up" death benefit. Under this feature, the guaranteed minimum death benefit is typically the greater of the actual account value at time of death (or at an earlier policy anniversary) or the total of all purchase payments minus any withdrawals.

    • For example, the guaranteed minimum might be the account value as of a specified date, which may be greater than purchase payments minus withdrawals if the underlying investment options have performed well.

    • The purpose of a stepped-up death benefit is to "lock in" investment performance and to prevent a later decline in the value of the separate account from eroding the amount the annuitant expects to leave to his or her heirs. This feature carries a charge, however, which will reduce the total return each year.
Types and Valuation of Variable Annuities
Related Articles
  1. Markets

    8 Sectors That Drones Are Influencing in 2016

    Find out which sectors of the economy are expected to be heavily influenced by the growing commercial application of aerial drones in 2016.
  2. Stock Analysis

    The Top 5 Small Cap Retail Stocks for 2016 (PLCE, FIVE)

    Pay close attention to the performance charts for small-cap retail stocks for signals demonstrating strength despite a disappointing quarterly earnings report.
  3. Stock Analysis

    Analyzing Johnson Controls’ Return on Equity (ROE) (JCI)

    Understand Johnson Controls' return on equity and the key drivers of profitability from an historical perspective and relative to its competitors
  4. Home & Auto

    Tax Breaks For Second-Home Owners

    The tax rules on a second home vary, depending on how the property is used.
  5. Trading Strategies

    Short Interest: What It Tells Us

    A stock’s short interest is the total number of shares that investors have sold short but have yet to close.
  6. Investing Basics

    ROA and ROE Give Clear Picture Of Corporate Health

    ROE indicates if a company’s value is growing at an acceptable rate. ROA reveals how much profit a company earns for every dollar of assets.
  7. Trading Strategies

    Mastering Short-Term Trading

    The proper application of a few different tools can help a short-term trader succeed.
  8. Home & Auto

    Ins And Outs Of Seller-Financed Real Estate Deals

    Seller financing works like this: Instead of a buyer receiving a loan from a bank, the person selling the house lends the buyer the money for the purchase.
  9. Insurance

    Indexed Universal Life: Flexibility and Safety

    A universal life insurance policy is a flexible form of permanent life insurance that offers the low-cost protection of term life with a savings element.
  10. Options & Futures

    How To Sell Put Options To Benefit In Any Market

    Selling a put option is a prudent way to generate additional portfolio income and gain exposure to desired stocks while limiting your capital investment.
RELATED TERMS
  1. Bail-In

    Rescuing a financial institution that is on the brink of failure ...
  2. Carbon Dioxide Tax

    A tax on businesses and industries that produce carbon dioxide ...
  3. Nonrenewable Resource

    A resource of economic value that cannot be readily replaced ...
  4. Green Economics

    Green economic theories encompass a wide range of ideas all dealing ...
  5. Corporate Accountability

    The performance of a publicly traded company in non-financial ...
  6. Green Fund

    A mutual fund or other investment vehicle that will only invest ...
RELATED FAQS
  1. How liquid are BlackRock mutual funds? (BLK)

    BlackRock, Inc. (NYSE: BLK) mutual funds are very liquid, as are all mutual funds. An investor receives payment for a redemption ... Read Full Answer >>
  2. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  3. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  4. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  5. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  6. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center