Mutual Funds vs the Subaccount

Life insurance companies often offer subaccounts for their policy holders to invest their insurance premium. This can be confusing because many individuals think of investments and insurance as two different categories of financial expenditures. This was true for some time, and an individual purchasing life annuities would simply be guaranteed to receive their principal plus interest at some point in the future. However, in order to offer an advantage in allowing the money to grow, insurance providers started offering subaccounts to policy holders, similar to mutual funds.

Mutual Funds Explained

A mutual fund is essentially a stock portfolio that an investor does not have to pick herself. Instead, she can place her confidence in a fund manager who selects and directs investments according to a certain risk profile or style. Most novice investors love this idea, because it spreads their risk, offering a consistent chance for income even if it does not offer a great wealth-building option. Most investors own shares in a mutual fund or a handful of mutual funds because of the ease of managing the investments. They simply pick the fund, purchase it, and watch it based on its ticker. For all practical purposes, owning shares in a mutual fund is no more complicated than owning one security.

Subaccounts Explained

Life insurance companies saw the mutual fund option as a chance to offer benefits to clients in addition to a simple interest rate return on their accounts. They began offering subaccounts as a competitive advantage over simple mutual funds. The insurance provider contracts with a mutual fund to offer a subaccount for that fund. Any one owning annuities in the life insurance company can then elect to place the money into one of the various subaccounts offered. Some insurers now offer 50 or more subaccount options, and policy holders can change options without incurring large fees.


For all practical purposes, whether a fund is purchased directly or through a subaccount, the results will be the same. The subaccounts mutual funds place with insurers are often carbon copies of the funds they trade on the market. An investor coming from either angle would receive the same capital gains, income and payouts on the account. Similarly, if the shares lose value, both individuals would experience the same loss. Ultimately, no matter which direction you take, you are electing a fund managed by the same company in the same fashion.

Key Differences

There are a few key differences, and most of these come in the form of taxable income requirements. When a mutual fund pays out income to its shareholders, the income is taxed. When the value of the fund increases, the capital gains is taxed. The investor pays this tax as he goes along. When the fund is purchased in the form of an annuity subaccount, it is in a tax deferred location. The funds growing in an insurance policy are like funds growing in a retirement portfolio, they will be taxed when they are paid out or withdrawn. Depending on your tax planning, one of the two options will be preferable.

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