How Do Variable Annuities Work? 
The policy owner places money into the contract by paying a premium . The premiums can be allocated to specialized insurance mutual funds called sub accounts . The investment performance of the sub accounts determines the cash surrender value of the annuities . There are generally additional benefits associated with the annuity like refund of premium upon death meaning the insurance company will pay the beneficiary at least the premiums put into the contract by the contract owner . This is helpful if the investment performance of the annuity has declined and the contract is worth less than the money placed into the contract . Additionally , many variable annuities have what are known as Guaranteed Minimum Withdrawal Benefits which offer certain guaranteed income benefits to the contract holder based on the cash value of the annuity . 