The ever-increasing complexity of our securities laws has led to a great deal of confusion among investors over the differences between mutual funds and variable annuity subaccounts. Are they the same thing or aren’t they? And if they really are mutual funds, then why can’t we just call them that? This article examines the similarities and differences between the two vehicles, and why a division exists between them.

Mutual Funds Overview

Subaccount History

In order to best understand the differences between funds and subaccounts, it may help to understand how subaccounts were created to begin with. In the past, life insurance companies had traditionally only offered fixed annuities and whole or universal life policies that guaranteed the holder’s principal plus interest.

In the 1980s, they decided to start offering a new breed of policies and contracts, which allowed their customers to participate in the equity and fixed income markets. Up until this time, a fixed annuity holder simply owned a single contract that paid a guaranteed rate of interest. But variable annuity policyholders would now have several different ways in which to invest the proceeds of their contracts. Therefore, mutual funds were introduced in the form of subaccounts that allowed customers to choose between various types of investment alternatives.

So What Is It?

The selection of subaccounts available in a particular contract is determined by agreement between insurers and fund companies. Insurance carriers will approach various mutual fund families and offer to place one or more of their funds inside their variable products (most carriers will offer the same array of subaccounts inside all of the different contracts and policies that they offer). Most insurers will offer funds from at least a half-dozen different companies, usually including at least one of each family’s flagship funds. Of course, the fund company benefits from having its subaccount funds distributed — and marketed — by the insurance carrier. (For more, see Getting The Whole Story On Variable Annuities .)

Subaccounts Vs. Mutual Funds

Characteristically speaking, variable subaccounts are, for all practical purposes, mutual funds in disguise. In fact, some subaccounts are virtual (if not exact) clones of their fund counterparts. They look and act like mutual funds, but there are a few differences that separate them from their independent cousins.

1. Tax-Deferred Accounts