Variable Annuity Accumulation Units

(A big piece of the variable annuity puzzle)

Reviewer: Jeffrey Green Written by Jeffrey Green
Reviewer: Jeffrey Green
Written by Jeffrey Green

Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career.  He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.

Reviewed by Neel Lane
Reviewed by Neel Lane

Neel Lane is an independent contract paralegal who specializes in Medicaid and VA benefits. He helps people access and maximize the benefits that they're entitled to. He has over 30 years of experience in this area.

Variable Annuity Accumulation Units

Americans saving for retirement bought $92 billion worth of variable annuities in 2018. That's because what variable annuities do is simple. They're a tax advantaged way to build wealth and create income for retirement. How do they work? Not so simple since variable annuities are a complicated mix of insurance and investments. Contact a local independent insurance agent. They can help you decide if a variable annuity is right for you.

First Things First — What Are Variable Annuities?

Variable annuities are policies issued by insurance companies. They pay a regular guaranteed income for life or a period of years. You buy a variable annuity contract by making either a single payment or a series of payments.

Deferred variable annuities accumulate money for a period of time, called the accumulation period, before the policy pays income. Immediate variable annuities pay income right away.

During the accumulation period, variable annuities accumulate money in investments selected by the owner called subaccounts funds. Like mutual funds or other investments, the value of the subaccounts are based on market performance. They aren’t guaranteed.

Why It's Called Variable

The value of variable annuities is represented by accumulation units. The value of each unit rises and falls with the investment it represents. The account value of a variable annuity rises and falls based on the value of the units, not because there are more or less units.

On the other hand, the value of fixed annuities is measured by dollars. When the value of a fixed annuity rises or falls it's because there are more or less dollars in the account.

Building Wealth: How Money Is Invested in Variable Annuities

Variable annuities have investment fund choices called subaccounts. These are similar to mutual funds. The subaccount funds offered usually represent a variety of asset classes such as stocks and bonds. They may also offer specific investment objectives such as retirement target-date funds.

Purchase payments are used to invest money in the variable annuity during the accumulation period. The purchase payments buy accumulation units of the subaccounts that you select. 

Accumulation units are similar to mutual fund shares. The accumulation unit values go up or down based on the performance of the investment fund subaccount.


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How Accumulation Units Are Different from Mutual Fund Shares

Mutual funds pool money from investors, and manage it on their behalf. The money is invested in stocks, bonds, or cash equivalents according to the fund's investment objective.  Investors own shares in the mutual fund. The price of each share is the value of the underlying securities divided by the number of shares at the end of the business day. When you purchase a mutual fund you purchase shares in the investment company. 

When you purchase a variable annuity, your payment is allocated to the subaccount funds of your choice. The value is represented by units, not shares. That's because the variable annuity investment company owns the subaccount investments. The units are used to value your share of those investments.

When mutual funds distribute dividends and taxable gains, the share prices are reduced. The distributions are usually taxable. When a variable annuity subaccount fund distributes capital gains and dividends, the value of the accumulation unit increases. The distributions are not taxable.

Creating Retirement Income from Accumulation Units

Remember, deferred variable annuities have two phases — the accumulation phase and the income phase. You can opt for variable lifetime income or guaranteed lifetime income.

Variable Income: The assumed rate of interest is what insurance companies use to calculate the initial variable income payments from an annuity. The initial payment is calculated based on your age, sex, the assumed rate of interest, the account value,  and the annuity income option that you select. 

If the subaccount funds that you selected perform better than the assumed interest rate, your payment will be higher. If the performance of the subaccount investments that you selected is lower than the assumed interest rate, your payments will be lower.

Variable income can be attractive to investors who want to keep up with inflation, and are comfortable with the risk.

Guaranteed Income: All of the annuity income options are available as a fixed guaranteed income. The guaranteed lifetime  minimum withdrawal benefit is available as a rider.

The chart below summarizes common variable annuity income options. 

During Lifetime At Death Advantages Disadvantages
Life  Pays income for annuitants’s life None Highest income, partly taxable No refund of unused principle
Life and 10 Years Certain Pays income for life, not less than 10 years Balance if death occurs before the end of 10 years Protection for beneficiaries, partly taxable Lower income
Life and 20 Years Certain Pays income for life, not less than 20 years Balance if death occurs before the end of 20 years Protection for beneficiaries, partly taxable Lower income
Life wIth Cash Refund Pays income for life, payments are at least specified refund amount Balance of refund amount Protection for beneficiaries, partly taxable Lower income
Period Certain Pays Income for a specified number of years Balance of payments Useful for certain planning purposes Outliving income
Joint & Survivor 100% Pays income for longer of two lives No further payments at second death Surviving spouse continues to receive income for life, partly taxable Lower income
Guaranteed Lifetime Withdrawal Benefit Single Life Pays income for annuitant’s life Balance of account Access to account values, death benefit Income taxed as withdrawals
Guaranteed Lifetime Withdrawal Joint Life Pays income for lifetimes of annuitant and second life Balance of account at second death Access to account, death benefit Income taxed as withdrawals

Why Do It Yourself?

Variable annuities can be an important part of your retirement plan. While they have many features and benefits, they are not for everyone. Be sure to talk to your independent insurance agent. They can help you decide if a variable annuity is right for you.

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