Definition
The separate account is the legally segregated pool of carrier assets that holds the investment elements of variable annuity contracts, structured so that the assets are insulated from the claims of the carrier's general creditors and so that investment risk on those assets is borne by the contract owner rather than by the carrier.
Why it matters
The separate account is the structural mechanism that distinguishes variable annuities from general account products. It is the reason variable annuity subaccount values are insulated from the carrier's general creditors in insolvency, and it is the reason the contract owner — not the carrier — bears the investment risk on those assets.
How it works
The separate account is established under state insurance law as a legally segregated portfolio, distinct from the carrier's general account. Variable annuity premiums allocated to subaccount investments are held in the separate account, not in the general account, and the separate account's assets are not available to satisfy the carrier's general obligations to other creditors. Each subaccount within the separate account is structured as a unit investment trust under the Investment Company Act of 1940 and is registered with the SEC; the underlying investment portfolios are managed under investment management contracts with affiliated or unaffiliated managers. Separate account assets are valued at market value daily, and contract owners receive contract values that reflect the daily market value of their subaccount allocations net of contract charges. Variable annuity guarantees that depend on the carrier's promise (death benefits, living benefits, income riders) are obligations of the carrier rather than of the separate account, and are supported by the carrier's general account capital.
In practice
For an individual holding a variable annuity, the separate account is the structural reason subaccount values are largely insulated from carrier credit risk during the accumulation phase: subaccount values reflect the underlying portfolios and are protected from the carrier's general creditors. The individual still bears investment risk on the subaccount assets and bears carrier credit risk on any guarantees attached to the contract, since those guarantees rely on the carrier's general account. A professional should be able to identify which contract elements depend on the separate account (subaccount investment values) and which depend on the carrier's general account (rider guarantees, fixed account allocations, death benefit guarantees). Plan fiduciaries evaluating in-plan variable annuity options should treat the separate account / general account distinction as part of the carrier-evaluation framework.
In the Longevity Standard Framework
Separate account is supporting vocabulary in the Longevity Standard framework — it is the structural counterpart to the general account and the mechanism by which variable annuity subaccount investments are held outside the asset-backed-claim structure that applies to general account products. Where a variable annuity carries an income guarantee, the income guarantee itself is an asset-backed claim against the carrier's general account, even though the underlying subaccount investments are held in the separate account; the cost-structure value that applies to such a contract is guarantee charge, the separately disclosed fee paid for the rider's general-account-supported guarantee.
Related terms
- General account
- Subaccount
- Variable annuity
- Asset-backed claim
- Guarantee charge
- Mortality and expense charge
- State guaranty association