January 26, 2004

 

 

Letters to the Editor

The Wall Street Journal

4300 Route 1 Ridge Road, Bldg #1

South Brunswick, NJ  08852

 

To the Editor:

 

We are writing in response to the recent article entitled "For a ‘Conservative’ Investment, Variable Annuities Are Too Costly" by Jonathan Clements, which appeared in The Wall Street Journal on January 21, 2004. We are concerned that the article provides an incomplete and inaccurate analysis and could, therefore, potentially mislead your readers about variable annuities, a valuable financial product that is helping Americans prepare for retirement. 

 

The article suggests that variable annuities are too expensive when compared to other investments, such as mutual funds. While variable annuities generally have somewhat higher fees than mutual funds, these additional fees pay for the insurance benefits they offer that are not available with other investments and which are largely ignored in the article.

 

Many variable annuities offer guaranteed minimum living benefits that offer protection against downside market risk.  For example, some contracts guarantee that the contract value will be at least equal to the initial investment after a specified period of time, such as 10 years, regardless of market performance. Others guarantee the systematic withdrawal of a certain percentage of premiums annually (e.g., seven percent) until the original investment has been completely recovered, again regardless of market performance.

 

The article also completely ignores another important insurance benefit offered by variable annuities, the right to elect payments that are guaranteed to last for the rest of the policyholder’s life (or for the lives of the policyholder and his or her spouse, if so elected), no matter how long that is. Investors can tailor a payout strategy that meets their preferred level of risk, choosing between fixed income payments, variable income payments, or a combination of the two. People are living longer and Social Security and pension plans are projected to play a diminishing role in generating a retirement income stream. In this environment, the value of this guaranteed lifetime income benefit cannot be overstated.  Annuities are the only financial product that provide this guarantee.

 

The article does discuss the death benefit offered by variable annuities but states that it is of value only “in the unlikely event you lose money on the account during your lifetime.”  In fact, no one can predict if they will die when the market is up or down, particularly during periods of market volatility, and many investors consider the death benefit to be vitally important since they know that their family will be protected against financial loss in the event of an untimely death.  In the past few years alone, insurance companies have paid out hundreds of millions of dollars in death benefit claims.  

 

Apart from the insurance benefits, the tax deferred compounding of variable annuities can still make them attractive for long-term investors.  This remains the case even after the recent tax changes made by the Jobs and Growth Tax Relief Reconciliation Act of 2003.  Finally, on the subject of fees, the article erroneously implies that all of the mortality and expense charge of a variable annuity applies to the death benefit – but in fact, in addition to the death benefit, the M&E charge pays for the guarantee of lifetime income at rates set in the contract at the time of purchase, and the guarantee that the annual insurance charges will not increase.         

 

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No product or investment is perfect for everyone, and investors need to fully understand their alternatives so that they can make choices based on their individual needs and circumstances.  We share a common goal of educating the public about variable annuities and trust our response will assist you in this effort.

 

Sincerely,

 

 

Mark J. Mackey

President & CEO

 

cc: Jonathan Clements