What Is an Annuity Unit?

An annuity unit is an accumulation unit for which the annuitant has annuitized their contract. This is a sub-account of the retiree's total accumulated annuity. These units represent a fixed share of ownership of the insurer's accounts portfolio and are different in key ways from mutual fund shares.

Key Takeaways

  • An annuity unit represents the time accumulated during an annuity contract.
  • AUV, which stands for accumulated unit value, shows how much each annuity unit is worth.
  • Accumulation units convert to annuity units once the insured wants to start making withdrawals.

How an Annuity Unit Works

When an annuity holder, or annuitant, changes from accumulating wealth to needing their savings, they begin to draw on their saved money to finance their retirement. While saving, the annuitant has made periodic payments to their life insurance company to purchase shares of ownership of a very large portfolio managed by the insurer.

Annuities occur when the insured wants to start taking money out, and so they convert their total accumulated savings to start paying them their income. To accomplish this, the insured party purchases annuity units with the money that was formerly being saved as accumulation units. Think of this as an accounting measure to determine your proportional ownership of your separate account.

What Annuity Unit Numbers Mean

Annuity sub-accounts resemble mutual funds, but there’s a difference between them and what has mostly to do with how their values are calculated. Investment company Fidelity, which offers annuities, explains it like this: "The net asset value, or NAV, is the value of each share of the mutual fund. That value, which is recalculated each day the stock market is open, is determined by dividing the total assets minus all liabilities by the number of outstanding shares each day."

Fidelity adds the following:

The accumulation unit value, or AUV, is the value of each unit within the Variable Account; this value is recalculated each day the stock market is open. The AUV takes into account the underlying fund’s daily performance as measured by the NAV change plus the impact of any distributions, such as capital gains and dividend income, less the annuity’s daily separate account charges. Since the value of the units you hold already represents your "share" of this activity, you won’t see any of the distributions reported separately on your annuity statement.

Another twist is that with mutual funds, there may be distributions of capital gains and dividends quarterly or annually, paid directly to the shareholder. With most annuities, the issuing company is the shareholder and these distributions decrease the net asset value of the fund and increase the number of shares.  

"When a distribution​​​​​​​ occurs, the fund’s NAV will decrease and the number of shares will increase, but the unit value of each subaccount will not change," according to Fidelity.