What does the "accumulation period" refer to in a variable annuity?

The accumulation period in a variable annuity is the phase during which the policy owner makes premium payments that are invested to build cash value. This period is crucial because it determines how much the investment can grow based on the performance of the selected investment options, which often include mutual funds or other investments. During the accumulation period, there is no immediate tax liability on the growth of these investments, allowing the value of the annuity to potentially increase significantly over time.

In the context of variable annuities, this phase allows policyholders to invest their contributions in a variety of options, increasing the potential for earning more in the long run, depending on market performance. Once the policyholder decides to begin taking withdrawals or to convert the account into an annuity phase for regular payouts, the accumulation period comes to an end.

Understanding this concept is key for anyone involved with variable annuities, as it impacts both future financial planning and the potential benefit that the annuity can provide during retirement or other financial goals.