Business News Select | SMPost | Terms

Term: Subaccount Charge

10 Dec 2014

Fees charged for the management of an investment fund. sub-accounts are used primarily in variable insurance products, and allow the policyholder to invest in a variety of portfolios in order to increase the value of the future annuity payout. The value of investments in a sub-account will fluctuate as the value of the underlying portfolio increases and decreases in value. When the investments are redeemed they may be worth more or less than the original cost.

When the same company that issues the insurance policy manages the sub-account, it is able to obtain premiums from underwriting the policy as well as fees for managing the sub-account’s investments. This allows the insurance company to bring in more revenue than if it had used an unaffiliated company to manage the sub-account, since that would lead to the unaffiliated company earning the fees from managing the sub-account’s investments instead.

The amount of fees that are charged for managing the sub-account’s investments are included in the fund’s expense ratio, and are available in the prospectus as well as sub-account statements. The fees charged can have a substantial impact on the long-term prospects of the portfolio, with high fees negatively impacting the overall performance. This is similar to how high management fees can reduce the overall growth of a mutual fund.

sub-account fees are listed in the contract’s prospectus, and the amount of fee can vary from fund to fund. From time to time, the insurance company will substitute the funds used in each sub-account with a different fund. When this happens the policyholder is notified. The new funds may carry different sub-account charges than the previous funds. Contracts typically allow the policyholder to transfer funds from a sub-account that has had funds replaced to a different sub-account for a period of time after the effective date. If the policyholder does not transfer funds to a different account during that time period, then the funds will automatically be reallocated to the replacement funds. Replacement funds typically have the same investment objectives.

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