Variable annuities are investments primarily used as either retirement plans or as supplemental life insurance coverage. Variable annuity subaccounts, like mutual funds, offer the account holder a selection of investment portfolios with different strategies and investment goals. Subaccount holders can track these through their quarterly statements or get more information about the mutual funds in the account. Investors should be aware of how fees and other charges are added to variable annuities, which can make them harder to track.
How Variable Annuities Work
Investors who buy variable annuities from insurance companies or other financial institutions pay into an account, which is managed by financial specialists. Upon retirement, the account balance is returned in monthly payments. Variable annuities are often bought by retirees who are worried about their finances or younger investors who have maxed out their 401(k) and IRA contribution limits, writes Entrepreneur magazine. Variable annuities also have a component that functions like life insurance, where the balance is paid out to an heir upon the account holder’s early death.
Variable annuity subaccounts invest either directly in mutual funds or in specially created “clones” of publicly sold mutual funds. Subaccounts offer investors choices on how much risk to take or in what industry sector to invest. Unlike the safer “fixed annuity,” variable annuity account holders can earn higher returns from riskier subaccount investments.
Subaccount holders receive quarterly statements that supply basic details about the financial performance of each mutual fund or fund clone in the annuity’s portfolio. From these statements, investors can track the total value of the portfolio’s holdings at both the beginning and end of the period, the number of shares held in the portfolio, the value of each share and the total earnings (or losses) generated by the fund.
Variable Annuity Fees
Variable annuity costs can include a number of fees, some of which can be hard for consumers to understand, reports The New York Times. Most accounts have holding periods of several years before money can be taken out, and penalties called “surrender charges” are set against early withdrawals. Mortality and expense risks charges of usually around 1.25 percent are added to cover the insurance coverage. Some companies will charge an administrative fee for services such as recordkeeping. Fees for the mutual funds that subaccounts holds also need to be factored into the variable annuity accounts charges.
Mutual Fund Reports
Investors who want more information about variable annuity subaccount performance can find it in the annual and semiannual reports of the mutual funds in the subaccounts. Mutual fund companies must make the fund’s prospectus and annual and semiannual reports available to the public. These reports provide a much closer look at the mutual fund, including lists of the fund’s top investments, breakdowns by industry sector, historical and current performance evaluations, comparisons against the S&P 500 or other indexes and a narrative from the fund’s managers about the overall performance and future outlook.
Terry Lane has been a journalist and writer since 1997. He has both covered, and worked for, members of Congress and has helped legislators and executives publish op-eds in the “Wall Street Journal,” “National Journal” and “Politico." He earned a Bachelor of Science in journalism from the University of Florida.