What Is an Annuity Fund?

An annuity fund is the investment portfolio that supplies the return on your premium. When the insurance company places your money in the chosen investment, your money earns interest. The return depends on whether your annuity is fixed or variable. The continuous stream of payments from this fund can act as a form of income in your retirement.

Kim Borwick, Financial Editor for Annuity.org
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    Kim Borwick

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    Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for Annuity.org.

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    Emily Miller, Managing Editor for Annuity.org

    Emily Miller

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  • Updated: May 5, 2023
  • 3 min read time
  • This page features 2 Cited Research Articles
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APA Borwick, K. (2023, May 5). What Is an Annuity Fund? Annuity.org. Retrieved June 8, 2023, from https://www.annuity.org/annuities/annuity-fund/

MLA Borwick, Kim. "What Is an Annuity Fund?" Annuity.org, 5 May 2023, https://www.annuity.org/annuities/annuity-fund/.

Chicago Borwick, Kim. "What Is an Annuity Fund?" Annuity.org. Last modified May 5, 2023. https://www.annuity.org/annuities/annuity-fund/.

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Annuity funds determine your rate of return and ultimately your guaranteed income payment amount. This is why it’s important to understand the difference between annuity types and how annuities work. It’s also helpful to have a foundational knowledge of the stock market and other elements of financial literacy, as annuities are only one aspect of a comprehensive financial plan.

Where Does Your Premium Go?

Annuities are categorized as either immediate or deferred and either fixed or variable.

In all cases, you pay a premium for your annuity. The insurance company invests your premium, along with the premiums it collects from hundreds of other annuity owners, and invests it.

Insurance companies are what are referred to in the investment world as “institutional investors.” Institutional investors invest huge sums of pooled money in stocks and bonds to generate returns large enough to allow them to pay out the income streams they guarantee.

The type of investments the insurance company puts your money in depends on the type of annuity you purchase.

Interested in Buying an Annuity?

Learn about the different types of annuities and find out which one is right for you.

Fixed Annuity Funds

Fixed-rate annuities provide a fixed payment amount determined in part by the level of risk the company is assuming, as well as the performance of the fixed securities market and the annuitant’s life expectancy.

Single premium immediate annuities (SPIAs) begin paying out within a year of purchase and their payment amounts never change. Deferred annuities begin paying out at a later date and include an accumulation period during which the account value grows as interest is compounded.

The annuity fund for a fixed annuity comprises bonds and other fixed-rate investments into which the insurance company invests the money. Although the fund won’t generate high returns, your money is safe and the insurer will typically guarantee a minimum interest rate for the life of the contract.

Variable Annuity Funds

Variable annuity funds are less stable because they consist of market-based investments. The insurance company gives you control of the subaccounts — the underlying portfolio of funds — allowing you to choose from a selection of bonds and stock options, including money market funds, mutual funds and bonds.

Because variable annuities are tied directly to the performance of the stock market, your rate of return can fluctuate, meaning it is possible for an annuity holder to lose money with a variable annuity.

Differences for fixed vs variable annuity funds

Riders and Annuity Insurance

Annuities are, in fact, a form of insurance. The annuity contract essentially transfers the risk of you outliving your money to the insurance company. Variable annuities, however, offer less longevity insurance in exchange for growth potential.

For savers and investors hoping to maximize the benefits of this financial instrument, annuities can be customized by purchasing riders that protect against the negative impact of the market. You can think of these additional provisions as insurance within insurance.

For example, a return-of-premium rider can be added to an annuity contract to ensure that the initial investment will not be lost. If you bought a $200,000 annuity and died after collecting only $50,000 of the original premium, this rider would guarantee that your beneficiary would receive the remaining $150,000.

Be aware that the addition of riders or annuity fund insurance will be accompanied by fees that will lower your income payment amounts.

The type of annuity fund — hence, the type of annuity — best suited to you will depend on your financial objectives. Just as you would weigh your goals with your risk tolerance when making investment decisions, you should weigh these factors before deciding on which type of annuity to buy.


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Last Modified: May 5, 2023

2 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Collins, P.J. (2016). Annuities and Retirement Income Planning. Retrieved from https://www.cfainstitute.org/-/media/documents/article/rf-brief/rfbr-v2-n2-1-pdf.ashx
  2. Kitces, M. (2014, July 2). Why It Rarely Pays To Wait On Taking Withdrawals From A Variable Annuity GLWB Rider – A Case Study. Retrieved from https://www.kitces.com/blog/why-it-rarely-pays-to-wait-on-taking-withdrawals-from-a-variable-annuity-glwb-rider-a-case-study/