Quick Answer
During the accumulation phase, purchase payments buy accumulation units, whose number rises with new payments and whose value tracks the subaccounts daily. Once annuitized, those units convert into a fixed number of annuity units whose value floats with performance, so the payout amount, not the unit count, changes each period.
The unit mechanics differ sharply between the two phases, and the exam tests both the arithmetic and the underlying logic of why the number of units is fixed in one phase and variable in the other.
Accumulation Units (Pay-In Phase)
During the accumulation phase, each purchase payment buys accumulation units, similar to buying shares of a mutual fund.
- Number of accumulation units purchased = payment amount / accumulation unit value (AUV) on that date
- The AUV fluctuates daily based on the net asset value of the underlying subaccounts
- Contract value = total accumulation units owned x current AUV
- Accumulation units can:
- Increase in number through additional payments
- Change in value through investment performance
Example: If the AUV is $10 and you invest $5,000, you purchase 500 accumulation units. If the AUV rises to $12, your contract value is 500 x $12 = $6,000.
Exam Tip: Gotchas
- Accumulation units work like mutual fund shares. Both the number and the value can change. The number increases with new payments; the value changes with investment performance.
Surrender Value
- Surrender value = current contract value minus any applicable surrender charges and outstanding policy loans
- Contingent deferred sales charges (CDSC) typically apply during the early years of the contract
- The surrender value is what the owner would receive upon full withdrawal or contract cancellation
Exam Tip: Gotchas
- Surrender value is NOT the same as contract value. Surrender value is reduced by any CDSC and outstanding policy loans.
Annuity Units (Payout Phase)
When the contract owner annuitizes, accumulation units are converted into a fixed number of annuity units:
- The number of annuity units remains constant for the life of the annuity
- The value per unit fluctuates based on separate account performance relative to the assumed interest rate (AIR)
- Monthly payout = fixed number of annuity units x current annuity unit value
- Once annuitized, the contract owner cannot surrender the contract or make additional changes (annuitization is irrevocable)
| Feature | Accumulation Units | Annuity Units |
|---|---|---|
| Phase | Pay-in (accumulation) | Payout (annuitization) |
| Number of units | Changes with each payment | Fixed at annuitization |
| Value per unit | Fluctuates daily | Fluctuates based on performance vs. AIR |
| Can add more? | Yes (additional payments) | No (number is locked) |
| Can surrender? | Yes (subject to charges) | No (irrevocable) |
Exam Tip: Gotchas
- During annuitization, the NUMBER of annuity units is fixed but the VALUE per unit changes. This means payments vary from month to month. This is often confused with fixed annuities, where payments are level.
- Annuitization is irrevocable. Once the contract is annuitized, the owner cannot surrender it or make changes.
What Should You Check on Exam Day?
- Recompute which quantity is changing: accumulation units change in both number and value; annuity units are fixed in number, floating in value.
- Do not confuse surrender value with contract value; surrender value subtracts surrender charges and any outstanding policy loans.
- Remember once annuitized, the contract cannot be surrendered or altered.