Because the insurance company is paying interest, all the invest- ment risk is borne by the company. The assets behind fixed annuities are invested in the general assets of the insurance company, and are referred to as portfolio products. Should the insurance company become bankrupt, the fixed annuity owner becomes a general credi- tor of the company.
Investors are attracted to fixed annuities when the interest rate is rising because their investment is guaranteed by the insurance com- pany, and the value won’t decline during a period of rising interest rates, as a bond’s value would. Plus, since the interest rate is rising, the insurer will be more likely to pay an increasing interest rate to investors.
Conversely, when interest rates are on the decline, investors tend to look elsewhere for returns. As the interest rate declines, so will interest rates on annuities. Although the premium amount will still be guaranteed by the insurer, it will remain static, unlike bonds whose prices will increase.
Variable annuities offer a number of different investment choices inside of the annuity, known as subaccounts. When establishing the variable annuity, owners can choose where they want their premiums to be invested each time. They can then change around the subac- count allocation whenever they want. The owner may also move money between the different subaccounts, both with no cost to the owner and with no tax consequences.
The different types of investment subaccounts, or separate accounts, are not part of the insurance company’s general assets. These subaccounts and their investment results stand on their own. The performance of the annuity contract as a whole depends upon the performance of the separate subaccounts, most of which are tied directly to the stock market. Therefore, the investment risk lies with the annuity owner, not the insurance company. Since the subaccounts aren’t part of the company’s general assets, should the company become insolvent, the variable annuity owners would not become general creditors of the company, as fixed annuity owners do.