November 4, 2003

 

Letters to the Editor

Contra Costa Times

P.O. Box 8099

Walnut Creek, CA 94596

 

Dear Sir or Madam:

 

We are writing in response to the recent article entitled "Variable annuities smelling rotten" by John Wasik which appeared in the Contra Costa Times on September 8, 2003.  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 it is true that variable annuities generally have somewhat higher fees than mutual funds, the additional expense can be more than offset by the tax-deferred compounding of earnings if the annuity is held as a long-term investment.  This remains the case even after the recent tax changes made by the Jobs and Growth Tax Relief Reconciliation Act of 2003.        

 

Moreover, the additional fees pay for the insurance features offered by variable annuities (which are largely ignored in the article). 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. Not surprisingly, many investors consider these features to be extremely valuable (and well worth the additional cost) given the recent volatility in the stock  market.

 

Variable annuities also offer a death benefit that guarantees that if the policyholder dies while saving for retirement, his or her beneficiaries will receive the greater of the amount of money that was invested or the policy’s value at the time of death.  Many variable annuities go even further and offer enhanced death benefits that lock in investment gains every few years or even every year. 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 millions of dollars in death benefit claims.

 

Another important insurance benefit offered by annuities is 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 provides this guarantee.

 

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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