Fixed and Variable Account Structures

The General Account and Fixed Insurance Products

When an individual purchases a fixed insurance policy, the assets supporting the contract guarantees reside in the insurer's general account after applicable charges and expenses. A fixed insurance product provides guaranteed minimum benefits backed by the insurer. Assets in the general account are owned entirely by the insurance company. The general account holds the collective assets that support the insurer's contractual guarantees, and these funds are primarily invested in conservative, fixed-income instruments such as high-grade corporate bonds and mortgages.

Under this structure, the insurer bears the investment risk associated with meeting its general account guarantees. Some fixed products, such as fixed annuities and universal life policies, credit interest subject to contract terms; traditional whole life instead provides guaranteed cash values without separately crediting an interest rate to the policyowner. Alternatively, a fixed indexed product uses an index-linked crediting formula. If general account investments underperform, the insurer must still meet its contractual guarantees, including a minimum credited interest rate when the contract provides one. However, policyowners remain exposed to the insurer's claims-paying ability, and general account assets are subject to the claims of the insurer's general creditors.

Fixed products provide the guarantees stated in their contracts, which vary by product. Not every fixed product guarantees both a minimum interest rate and a death benefit. A central drawback of fixed contracts is purchasing power risk. Because fixed interest rates may not keep pace with inflation over long holding periods, the purchasing power of the accumulated cash value can erode over time.