I thought I understood variable annuities, but I cannot seem to wrap m...

Once the number of annuity units has been determined, that number is fixed and, so, for example, every month an annuitant would be paid the value of 101 annuity units.

What is the monthly value of an annuity unit? That depends on the investment performance of the subaccounts compared to the expectation of performance known as AIR, or assumed interest rate.

If the returns are higher than the assumed rate, the units increase in value. If the account returns are exactly as expected, the unit value remains the same. And, if the account returns are lower than expected, the unit value drops from that it held in the previous month. 

It is all based on the assumed interest rate (AIR) —typically 3, 4, or 5%. If the AIR is set at 5%, the subaccount investments are expected to grow each month at an annualized rate of 5%. If the account has a 6% annualized rate of return one month, the payout increases. If the account grows at the anticipated 5% rate of return during the next month, that month’s payout remains the same. And, if the account has only a 4% rate of return during the next month, the payout will decrease.

If the AIR is 5%, here is how it might work:

When the account receives a 7% return, the account increases. Then, when it has only a 6% return in the following month, that is 6% of a larger account and is 1% more than expected. 

Thus, if the actual return is larger, so is the monthly payout. If it is smaller, so is the payout. If the actual return is the same as the AIR, the payout stays the same.