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What Is an Annuity Fund?

An annuity fund is where the investment portion of your annuity policy resides. Understanding how it works — and the key differences between fixed and variable fund structures — is essential before you buy.

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The Basics

Where Your Annuity Money Actually Goes

An annuity fund is where the investment portion of your annuity policy resides. There are two main types of annuity policies, and the annuity funds for each are structured quite differently. Understanding the distinction is one of the most important steps in evaluating which type of annuity is right for you.

Fixed annuities have annuity funds that pay a predetermined set rate of return, similar to a certificate of deposit or bond. The insurance company evaluates the risk involved, analyzes the fixed securities market, and sets a rate of return. Immediate annuities with a fixed rate of return pay an amount that does not change over the life of the annuity. Holding the rate of return constant is how the issuer can determine the amount of guaranteed lifetime income to pay out for a one-time lump sum investment.

Variable annuities do not have a set payment rate. You invest the annuity fund in stocks and bond portfolios that have the potential to give you a higher return on your investment — but your account value can also decline when markets fall.

Quick Reference

▶ Fixed funds: set rate, principal guaranteed
▶ Variable funds: market-linked, higher potential but more risk
▶ Fixed funds go into the insurer’s general portfolio
▶ Variable funds held in separate sub-accounts
▶ Annuity insurance riders available for both types
▶ What happens at death depends on contract structure

Two Structures

Fixed vs. Variable Annuity Funds

The fund structure determines how your money grows, how much risk you carry, and what you can expect to receive in retirement.

Fund Type 01

Fixed Annuity Funds

Fixed annuities have annuity funds that pay a predetermined set rate of return like a certificate of deposit or bond. The insurance company evaluates the risk involved, analyzes the fixed securities market, and sets a rate of return. A fixed retirement annuity receives steady contributions and the insurance company will set a fixed rate of return and sometimes a minimum rate of return.

The annuity funds go into the company’s general portfolio — not into an account set up solely for you. Asset managers conservatively divide the money between various investments. The bulk is used to purchase predictable government securities and investment-grade bonds or preferred stocks. They invest the remainder in blue-chip stocks and commercial real estate.

Insurance companies are experts at receiving above long-term market returns on balanced portfolios, assuring that your funds are available as needed and enabling them to offer you low-risk returns that are better than you could obtain on your own.

Fund Type 02

Variable Annuity Funds

Variable annuities do not have a set payment rate. You invest the annuity fund in stocks and bond portfolios that have the potential to give you a higher return on your investment. Some providers offer more than 50 different investment options ranging from growth stocks to government bonds.

Passive investors can choose balanced target date funds or equity index funds. Active investors can move money between domestic equity funds, international funds, bond funds, and individual sector funds as economic conditions shift.

A major attraction of variable annuities is the extra tax-deferred growth of principal compared to a fixed annuity. The downside is that your annuity fund can lose value when markets decline, while a fixed annuity continues to grow. The contract holder bears all investment risk in a variable product.

Protecting Your Fund

Annuity Fund Insurance Options

Several protection structures can be written into annuity contracts or added as riders to safeguard your fund value.

Option 01

Portfolio Value Protection (Built-In)

One common form of annuity insurance reduces your gain in good years as you share a set percentage of all gains with the issuer. In return, your portfolio does not lose any value in bad years. This form is usually written directly into fixed-indexed annuity contracts and represents the standard floor-and-cap structure most buyers encounter.

Option 02

Secure Income Benefit Rider

Separate insurance riders, such as a guaranteed income benefit, require a premium based on a percentage of your annuity value. You are guaranteed a set percentage of your initial portfolio that you may withdraw each year for life. Once you start taking withdrawals, the amount can never go down even if the current value of your account drops to zero — though it can go up in good market years.

Option 03

Return of Premium Rider

The return of premium rider ensures that the annuity fund owner will never receive a payout of less than the amount of money invested. If the owner dies before receiving the full amount invested, the remainder goes to a designated beneficiary — functioning similarly to a life insurance policy benefit. Sometimes the rider is written to cover the full current value of the account rather than just the original premium.

Estate Planning

Death and Your Annuity Fund

What happens to your annuity fund at death depends on the stage of your contract and how it was structured.

During Payout Phase

Payments Continue to a Joint Beneficiary

If you have already started receiving income payments, payments will continue to a joint beneficiary until that beneficiary’s death. When there are no living beneficiaries, the issuer receives the balance of the account. This is the basic structure of a joint-lifetime annuity — the most common choice for married couples.

Pre-Payout Phase

Account Value Paid to Listed Beneficiaries

When the annuity fund is still in the accumulation phase (pre-withdrawal), the value of the account can be paid out to any listed beneficiaries. If the beneficiary is a spouse or partner, the contract can be transferred solely into their name. The return of premium rider ensures the annuity fund owner will never receive a payout of less than the amount of money invested.

Questions & Answers

Frequently Asked Questions

1 What is the difference between an annuity and an annuity fund? ▼

An annuity is the overall contract between you and the insurance company. The annuity fund is specifically where the investment portion of that contract resides — the pool of assets that grows over time and eventually generates your income payments. Think of the annuity as the legal wrapper and the annuity fund as the engine inside it.

2 Can I lose money in an annuity fund? ▼

It depends on the type. Fixed annuity funds guarantee your principal — they cannot decline due to market movements. Variable annuity funds are invested in market sub-accounts and can and do decline when markets fall. If you withdraw funds during the surrender period and exceed your free withdrawal allowance, you will also pay a surrender charge, which can result in receiving less than you put in regardless of fund type.

3 Where does the insurance company invest fixed annuity funds? ▼

Fixed annuity funds go into the insurance company’s general account portfolio. Asset managers conservatively allocate the majority to predictable government securities and investment-grade bonds, with the remainder in blue-chip stocks and commercial real estate. These companies are expert at managing balanced portfolios and can generally deliver returns above what most individual investors could achieve on their own with comparable risk levels.

4 What happens to my annuity fund when I die? ▼

The outcome depends on two factors: whether you had started receiving payments, and how your contract was structured. If you were in the payout phase, payments continue to a joint beneficiary. If you were still in the accumulation phase, the value of the account can be paid to named beneficiaries. A return of premium rider ensures beneficiaries receive at least the amount you originally invested if you die before collecting it back.

5 What is annuity fund insurance? ▼

Annuity fund insurance is a form of portfolio value protection. It is written into some annuity contracts and available as an insurance rider for many variable annuities. The most common form caps gains in exchange for a guarantee that the fund will not lose value in negative market years. Separate guaranteed income benefit riders add another layer: they guarantee a minimum lifetime withdrawal amount regardless of how the underlying fund performs.

6 Is a fixed or variable annuity fund better? ▼

Neither is universally better — each serves a different need. A fixed annuity fund is appropriate when principal protection and predictable income are the priority. A variable annuity fund is appropriate when you have a longer time horizon, higher risk tolerance, and want the potential for greater growth. Many retirees use a fixed product to cover essential monthly expenses and a variable or indexed product for additional growth potential.

Ready to Find the Right Annuity Fund for Your Retirement?

Whether you want the stability of a fixed fund or the growth potential of a variable one, a licensed advisor can match you with the right structure for your situation — no pressure, no obligation.

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