Accumulation Unit: in a variable annuity, a unit of the amount added to the overall investment during the accumulation period is called an Accumulation Unit.
Accumulation Unit Details:
Don’t worry if the definition above still has you scratching your head; in this section, we discuss the term in much more detail. Our intention here is to simplify the term for you. Let us break the definition for this purpose and talk about all the terms used there. The first of these is a variable annuity.
A bank, or any other financial institution, generally offers two types of annuities—fixed and variable. A fixed annuity guarantees a fixed amount that the bank directly credits to your account within regular intervals. Elderly investors often prefer this kind of investment for its usual short terms. New investors also go for a fixed annuity because they are still learning and might be skeptical about the scenario.
Variable Unity, on the other hand, invests your money in a mixture of mutual funds. Here, the bank does not credit you with your dividend or returns; instead, it adds the surplus to your total investment. This process occurs during an accumulation period or accumulation phase, during which your income is in its accumulation stage. Once your contract with the bank finishes, this reinvestment will stop, and you will get your surplus amount. Hence, the accumulation unit is a portion of investment or a dividend that you have chosen to invest back to gain higher overall returns.
Accumulation Unit Example:
Let's say that a person invests in some shares through a bank but decides to go for income units. The bank will credit the fixed amount of income earned, let’s say 4%, to the person’s account. In the case of accumulation units, the bank will reinvest the 4% into the main investment amount. Each amount or unit invested at that point is the accumulation unit.
Significance of Accumulation Unit
Many people ask why they should go for any other alternative when they have the option of getting a fixed, assured income through income units.
The main benefit of the accumulation unit is that it results in a greater wealth creation compared to the other option. The bank adds the income generated by your portfolio until the end of the contract. In short, your investment amount earns its own additional investment units, and the bank further invests this new amount in different shares or mutual funds. Before reinvestment, the bank considers the past success of these shares or funds.
So far, so good, but there are also potential risks involved. For instance, one should also keep in mind that the amount of this income depends on the performance of the main funds that the bank has invested your money in. If the performance of that account falters, then the revenue generated will also vary. An increase in investment amount also means increased risk-taking. That is why the accumulation unit is liked more by more adventurous investors, though many retirees also opt for accumulation units.