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 All earnings are taxed at ordinary income tax rates when withdrawn.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. 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.
  2. Financial Advisors

    Variable Annuities: The Pros and Cons

    Variable annuities are one of the most complicated financial instruments. Here is an in depth look at their pros and cons.
  3. 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; ...
  4. Retirement

    Annuities: How To Find The Right One For You

    Fixed, variable and indexed annuities offer different features. Find out which one fits your needs.
  5. Retirement

    How Are Variable Annuities Taxed?

    Before investing in a variable annuity, discuss your personal financial picture with a knowledgeable financial advisor.
  6. Retirement

    Who Benefits From Retirement Annuities

    Annuities guarantee some degree of fixed income in retirement. But is the security worth the fees and less favorable tax treatment? How to decide.
  7. 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 ...
  8. Options & Futures

    Getting the Whole Story on Variable Annuities

    Variable annuities are another way to save money tax-deferred - but don't jump in blindly!
  9. Home & Auto

    Watch Your Back In The Annuity Game

    Find out how to get the upper hand when dealing with this payout challenge.
  10. Options & Futures

    20 Investments: Annuity

    What Is It? You can think of an annuity as another way of saying "annual payments". An annuity is a series of fixed-amount payments paid at regular intervals over the specified period of the ...
RELATED TERMS
  1. Annuity

    A financial product that pays out a fixed stream of payments ...
  2. Valuation Period

    The time between the end of the business day of the first business ...
  3. Income Annuity

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

    An annuity option in which the amount of income payments received ...
  5. Deferred Annuity

    A type of annuity contract that delays payments of income, installments ...
  6. Hybrid Annuity

    An insurance contract that allows buyers to allocate funds to ...
RELATED FAQS
  1. 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 >>
  2. What are the risks of annuities in a recession?

    Distinguish between the most common types of annuities, and understand which types of annuities pose the most risk during ... Read Answer >>
  3. 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 >>
  4. For what types of financial instruments would I want to calculate the present value ...

    Learn about the types of financial instruments the present value of an annuity calculation is most useful for, including ... Read Answer >>
  5. How are variable annuities regulated?

    Discover the various rules that the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority ... Read Answer >>
  6. How are non-qualified variable annuities taxed?

    Reduce your tax bill by knowing the tax advantages and disadvantages to owning or inheriting a non-qualified variable annuity ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center