Accumulation Phase
The accumulation phase is the period during which the investor is putting money into the annuity contract. During this time, the money in the securities is generating dividends, interest and capital gains that are reinvested on a tax-deferred basis. The money will purchase accumulation units in the separate account. Accumulation units are accounting measures that represent the investor's share of separate account ownership, similar to the net asset value of mutual fund shares. The accumulation unit value will change with the value of the securities held in the separate account and the total number of accumulation units outstanding.

There is no penalty if the investor misses a payment during the accumulation phase. In fact, the client can terminate the contract at any time during this period. Some insurance companies allow investors to borrow from the annuity during the accumulation phase to discourage cancelations.

Annuitization Phase
The annuitization phase is the period during which the investor draws income from the annuity; it is the payout stage of the annuity. When the contract is annuitized, the accumulation units become annuity units. The rate of exchange from accumulation units to annuity units is determined by an actuarial formula that takes into consideration several factors, including the annuitant's age, sex, payout option chosen and a baseline measure called the assumed interest rate (AIR). (The AIR is a rate used to evaluate the returns on the separate accounts in order to determine future payments.) The annuity units in turn will define the amount of monthly payments to the annuitant.

Once the number of annuity units is determined, the insurance company will decide the payout amount per unit. The number of annuity units remains fixed throughout the payout period; however, the value of the annuity units will fluctuate in relation to the performance of the separate account. The periodic payments may be more, less or equal to each other, depending on the value of the separate account in relation to the AIR.
 

Exam Tips and Tricks
The exam will ask at least one or two questions on the two phases of an annuity\'s lifetime. It will also test your understanding of accumulation and annuity units.

The following article, Getting the Whole Story on Variable Annuities, discusses the good, the bad and the ugly of these investment vehicles.

Types of Annuity Payouts

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