Nested Interest

A variable immediate annuity is a type of immediate annuity that provides an income benefit that varies with the investment returns of a set of investment funds selected by the contract-holder.

At contract inception, the initial benefit is calculated based upon an assumed investment return (“AIR”); if actual investment returns were to exactly match the AIR the benefit amount would remain unchanged.

The income benefit is adjusted periodically, typically using a formula similar to the following:

New Benefit = (Prior Benefit)x(1+Fund Returns-AIR-Fees)

where

• New Benefit is the income benefit corresponding to the next benefit period
• Prior Benefit is the income benefit corresponding to the prior benefit period
• Fund Returns is the rate of investment returns experienced during the prior benefit period
• AIR is the assumed investment return
• Fees are the asset based fees imposed by the insurance company

So, the benefit increases when fund returns exceed the sum of the AIR and the fees imposed by the life insurance company.

Insurance companies usually offer a wide range of funds in which the contract-holder may elect to invest, each having different risk and return characteristics.