The deferred variable annuity contract has two phases. In the accumulation phase of a variable deferred annuity, each premium payment purchases, after applicable contract charges are deducted, a number of accumulation units for each investment subaccountchosen by the contract holder.
Example: Mr. Jones has chosen five investment subaccounts from among those available in his variable deferred annuity. He has directed that each premium payment (after deduction for contract charges) be allocated to these accounts as follows:
The accumulation unit values of these accounts on the day his premium is received are set forth in the table below, along with the changes in the subaccounts that will occur when Mr. Jones makes a premium payment of $1,000 with $14 in applicable contract charges.
Accumulation unit values can, and often will, change each day according to the investment performance of the subaccounts, just as the net asset value of a mutual fund share does. However, there is a significant difference between the pricing of annuity accumulation unitsand that of mutual fund shares. When a mutual fund declares a dividend or capital gains distribution—through the realization of dividends or capital gains income by the fund—and the shareholder has elected to reinvest such distributions, additional shares are purchased for his account, and the price of all shares of the fund is reduced to reflect the distribution.
If the shareholder has elected not to reinvest such distributions, he receives cash, and the share price is reduced. By contrast, when a dividend or capital gain is realized by a variable annuity subaccount, the value of the accumulation unitis increased reflecting the dividend or gain received, but the number of units remains the same.
One of the main advantages of investing in a variable annuity is the access it provides to diversified investment types. The first variable annuities offered relatively few investment choices, and the choices were often limited to proprietary accounts; that is, accounts managed by the insurance company that issued the annuity, or a subsidiary. Newer contracts, by contrast, offer subaccounts representing a wide variety of asset classes, managed by a variety of money management firms.