Variable annuities bear some resemblance to mutual funds, but there are significant differences between these financial products. Specifically, the value of an accumulation unit is not the same as the value of a mutual fund share.
Likewise, an accumulation unit is not the same thing as an income unit. In order to understand and assess the value of a variable annuity subaccount, you need to know the difference between these terms.
How Do Accumulation Units Work?
When you “allocate annuity assets” in a deferred variable annuity, you are essentially buying units of a subaccount. As opposed to investors who buy shares of a mutual fund, annuity owners are not shareholders.
The insurance company is the shareholder of the mutual fund and, subsequently, the recipient of any interest or dividend distributions. The annuity owner, on the other hand, is not entitled to any interest or dividends.
Your ownership of the investment option — that is, the separate account (subaccount) — you choose to contribute to is represented by the annuity unit value, not the net asset value, which represents the value of a single share.
If the variable annuity’s investments fall, the accumulation unit value also falls. This means that the annuity’s value is lower, even though the number of units remains the same.
- Accumulation unit value (AUV)
- The value of each unit in the variable account
- Net asset value (NAV)
- The value of each share of the mutual fund
- The separate account of a variable annuity
- Mutual fund
- An investment company that pools money from many investors and invests it based on specific investment goals (FINRA)
- Deferred variable annuity
- A variable annuity that begins paying income after a period of accumulation
To help investors understand how their variable annuity contract works, the U.S. Securities and Exchange Commission requires that all variable annuities be accompanied by a prospectus, which explains the investment objective and the methods for assessing the value of the variable accounts.
Income Units vs. Accumulation Units
Income units are paid in the form of interest and dividends, which go directly to the investor, whereas accumulation units are reinvested into the variable annuity subaccounts.
Immediate annuities, which convert premiums to income right away, don’t have an accumulation period. People who purchase immediate annuities for an income stream that begins right away are not counting on the annuity value to grow. The value of their annuities is measured in income units, also referred to as annuity units.
This is why it’s important to have a clear goal for your annuity. If you don’t know your objectives for any type of annuity or investment, you may wind up with an annuity that doesn’t fit your financial needs.
When a deferred variable annuity is annuitized, the accumulation units are converted to income units and earnings are no longer reinvested for compound growth.
Another Benefit of Accumulation Units in Separate Accounts
Unlike fixed annuities, variable annuities are regulated by the SEC and the National Association of Insurance Commissioners.
The insurer’s general account is not protected from creditors if the company fails.
The separate account, however, is not subject to the claims of creditors in such a case.