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what are variable annuity sub-accounts

Variable annuities allow people to put money into mutual funds, including stock funds, bond funds, and money market funds, so the principal has the potential to grow. Each variable annuity fund is called a sub-account. Here’s what you need to know about variable annuity sub-accounts, their nature, fees and tax provisions. Consider speaking with a Financial Advisor if you are trying to determine how these annuities can play into your financial plan.

What are variable annuity sub-accounts?

when you buy a variable annuity, you choose the sub-accounts in which your money will be invested. You can also decide how much to invest in each. For example, when purchasing a variable annuity, you can choose to invest 65% of your money in a stock fund, 25% of your money in a bond fund and 10% in a Money Market. In such a case, the annuitant (the person holding the annuity) would have three sub-accounts.

Although variable annuity sub-accounts contain investments identical to mutual funds, they do not have a stock symbol which you can search in an investment database to find information about the fund. Additionally, due to their tax-deferred status, sub-accounts may perform slightly differently than their mutual fund counterparts.

Money that is withdrawn from a variable annuity before age 59.5 is subject to a 10% penalty.

Variable Annuity Sub-Account Fee

Variable annuity sub-accounts come with many fees. Each sub-account charges a management fee, which is often lower than the fees charged by mutual funds for similar investments. Second, insurers may also charge transfer fees for transferring funds between sub-accounts.

Third, variable annuities charge other fees to protect the insurance company against the risk that you live longer than expected by the issuer’s actuaries or that the company’s expenses are higher than expected. As a result, the cost of a variable annuity often exceeds that of a comparable mutual fund.

Fixed or variable annuities

The main difference between fixed and variable annuities is their growth potential. With a fixed annuity, you make either a lump sum payment or a series of payments and receive a fixed amount each month, quarter or year. In other words, payments neither increase nor decrease. You are paying for the right to receive a steady stream of income for the rest of your life. However, payments for fixed annuities can be small relative to their cost to the annuitant.

Variable annuities, on the other hand, allow you to invest your money in the market, giving you the opportunity to benefit from favorable market conditions. This could lead to higher payments down the road. But variable annuities also expose you to market risk, which means you could end up losing money. In other words, with a variable annuity, you assume more risk for the possibility of a higher reward.

Types of variable annuities

what are variable annuity sub-accounts

what are variable annuity sub-accounts

Variable annuities can be immediate or deferred. Deferred variable annuities tend to be more popular than immediate variable annuities. Deferred variable annuities have an accumulation phase, a period during which the account value grows. Variable annuities typically allow one withdrawal per year during the accumulation phase. The accumulation phase ends and the payout phase begins when you start collecting annuity payments.

Advantages and disadvantages of variable annuities

Compared to fixed annuities, variable annuities have their own set of advantages and disadvantages.


  • Deferred tax: Money from a variable annuity is tax-deferred, so you pay no tax until the money is withdrawn.

  • Customizable: Variable annuity sub-accounts allow you to decide how to invest your money; you can choose investments that match your goals, risk profile and time frame.

  • Death benefit: If you die before the payment phase, there may be a guarantee death benefit for your beneficiaries.

The inconvenients

  • Market risk: Variable Annuity Sub-accounts may expose you to market risk, especially if you invest in stocks. Therefore, you could lose money if the stock markets are not performing well.

  • Early withdrawal: Variable annuities are treated like retirement accounts, meaning you can’t access your money until age 59.5 without paying a 10% penalty.

  • Costs: Each sub-account charges a management fee, which is in addition to the fees imposed by the annuity. Therefore, the total fees on a variable annuity can be quite high.


what are variable annuity sub-accounts

what are variable annuity sub-accounts

A variable annuity, sometimes referred to as an annuity-wrapped mutual fund, allows you to invest a portfolio of sub-accounts that can include investments such as stock funds, bond funds and money market funds. Because they allow you to invest in the market, variable annuity sub-accounts give investors the opportunity to increase the value of their accounts. Investors can also choose between sub-accounts of their variable annuity. However, variable annuities also expose investors to market risk. The fees can also be quite steep and you face an early withdrawal penalty if you withdraw money before age 59.5.

retirement advice

  • It can be difficult to choose the right investments that will help you achieve your financial goals. Talking to a financial advisor might be the best way to help you figure it out. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • Annuities can help you grow your investment over time, but it can be difficult to know exactly how much you need. Use SmartAsset retirement calculator to better understand your retirement trajectory and how much you will have in retirement.

  • Investing can be a powerful tool for growing your wealth. Our investment calculator can help you understand how your investments might grow over time.

  • Before making a final decision on which retirement investments to choose, it’s always a good idea to meet with a financial advisor. Smart Assets financial advisor tool can help you find a fiduciary financial advisor near you to help you make the best decision for your situation.

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