insurance

Separate Account

Investment accounts in variable insurance products where premiums are invested in underlying mutual fund-like investment options, kept separate from the insurance company's general assets. The account value fluctuates based on the performance of chosen investments, with the policyholder bearing the investment risk.

Example

“Tom allocated his variable annuity premiums among three separate account options: a growth stock fund, a bond fund, and an international equity fund, allowing him to control his investment mix.”

Memory Tip

Separate Account = 'Your investments separated from theirs' - your money is kept separate from the insurance company's general funds.

Why It Matters

Separate accounts give you investment control and growth potential in insurance products, but also expose you to market risk. Understanding how these accounts work is crucial because your policy's cash value and death benefit can fluctuate significantly based on investment performance.

Common Misconception

Many people think separate accounts are FDIC insured like bank accounts, but they're actually securities investments with no guarantees. Others believe the insurance company manages these investments, when in fact they're typically managed by third-party mutual fund companies.

In Practice

If you invest $10,000 annually in a variable annuity's separate accounts allocated 60% to stocks and 40% to bonds, and the stock fund gains 12% while the bond fund gains 4% in year one, your $10,000 would grow to approximately $10,880 ($6,000 × 1.12 + $4,000 × 1.04). However, if the stock fund loses 20% the next year, your account value would decline significantly, unlike guaranteed general account options.

Etymology

From Latin 'separatus' meaning 'set apart' and 'account' from Old French 'acont' meaning 'reckoning,' referring to investment accounts kept separate from the insurer's main business assets.

Common Misspellings

seperate accountseparate acountseparete accountseparate accont

More in insurance

Other insurance terms you should know

deductibleThe amount you pay out-of-pocket before your insurance begin…insurance premiumThe amount paid periodically to an insurance company in exch…deductibleThe amount a policyholder must pay out of pocket before insu…copayA fixed amount paid by an insured person at the time of a me…coinsuranceA cost-sharing arrangement where the insured pays a percenta…out-of-pocket maximumThe most an insured person will pay for covered healthcare s…