What Is an Annuity Fund?

An annuity fund is the investment portfolio that supplies the return on your premium. When the insurance company places your money in the chosen investment, your money earns interest. The return depends on whether your annuity is fixed or variable. The continuous stream of payments from this fund can act as a form of income in your retirement.

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    Jennifer Schell

    Jennifer Schell

    Financial Writer

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

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    Lamia Chowdhury
    Lamia Chowdhury

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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  • Financially Reviewed By
    Rubina K. Hossain, CFP®
    Rubina K. Hossain

    Rubina K. Hossain, CFP®

    Client Advisor for MEIRA

    Certified Financial Planner Rubina K. Hossain is chair of the CFP Board's Council of Examinations and past president of the Financial Planning Association. She specializes in preparing and presenting sound holistic financial plans to ensure her clients achieve their goals.

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  • Updated: August 27, 2023
  • 4 min read time
  • This page features 4 Cited Research Articles
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Key Takeaways

  • Insurers invest premiums from annuity contracts into annuity funds that generate growth for those contracts.
  • A fixed annuity fund consists of low-risk investments like corporate or government bonds, which produce reliable returns.
  • Variable annuity funds contain a variety of security investments and have a higher growth potential but lack principal protection.
  • Annuity funds determine your rate of return and, ultimately, your guaranteed income payment amount.

Where Does Your Annuity Premium Go?

When you purchase an annuity, you pay a premium either in a lump sum or multiple installments. Your annuity provider takes your premium payment and the premiums from other annuity contracts and invests them.

Insurance companies are what are referred to in the investment world as “institutional investors.” Institutional investors invest huge sums of pooled money in stocks and bonds to generate returns large enough to allow them to pay out the income streams they guarantee.

An annuity fund is essentially the portfolio of investment options that providers invest annuity premiums in to generate growth on the annuity contract. The type of investments the insurance company puts your money in depends on the type of annuity you purchase.

Fixed Annuity Funds

Fixed-rate annuities provide a fixed payment amount determined in part by the level of risk the company is assuming, as well as the performance of the fixed securities market and the annuitant’s life expectancy.

Most fixed annuity premiums are invested in high-quality corporate bonds. Annuity providers ensure that the cash flow received from these bonds matches the obligations of their annuity contracts. In this case, cash flow refers not only to the bonds’ interest payments but also to the repayment of the principal investment when the bond matures. 

The maturity of the bonds in a fixed annuity fund affects the annuity’s surrender charge schedule. Insurers use the surrender period to discourage annuity owners from cashing out their contracts before the bond investments in the fund have matured. For example, if a large portion of the fixed annuity fund is invested in government bonds with a 10-year term, the provider might include a 10-year surrender period in their fixed annuity contracts.

Fixed annuity funds have lower risk and lower growth potential. Although the fund won’t generate returns as high as a more aggressive portfolio might, your money is safe, and the insurer will typically guarantee a minimum interest rate for the life of the contract.

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Variable Annuity Funds

Variable annuity funds are less stable because they consist of market-based investments. Because insurers invest variable annuity premiums in securities, variable annuities are required to be registered with the Securities and Exchange Commission.

When you purchase a variable annuity, you can direct your premium to be invested in one or more subaccounts. These subaccounts work like mutual funds and make up the portfolio of your variable annuity fund. 

The insurance company gives you control of the subaccounts, allowing you to choose from a selection of bonds and stock options, including money market funds, mutual funds and bonds.

Since variable annuities are tied directly to the performance of the stock market, your rate of return can fluctuate, meaning it is possible for an annuity holder to lose money with a variable annuity.

Fixed Annuity Fund Variable Annuity Fund
Fixed-rate investments Market-based investments
More stable More volatile
Minimal returns Potential for greater returns

Frequently Asked Questions About Annuity Funds

Where are premiums placed in a variable annuity?

Variable annuity premiums are placed in subaccounts, which are investment portfolios that can accumulate value for the annuity contract. The average variable annuity has 52 subaccounts to choose from.

Where are the premiums from fixed annuities invested?

Fixed annuity premiums are invested in portfolios of high-quality, low-risk investments such as corporate bonds.

How do insurance companies pay annuities?

Insurance companies pay annuities in a variety of ways, including free withdrawals each year, a lump sum when the annuity matures, or a stream of income payments. The income stream can be arranged to last for the annuitant’s lifetime or their and their spouse’s lifetime. If the annuitant dies before the annuity finishes paying out, the insurance company pays the annuity’s remaining value and any death benefit included in the contract to the named beneficiary.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 27, 2023