March 28, 2003

 

 

Jim Frisinger

Letters to the Editor

The Dallas Morning News

PO Box 655237

Dallas, TX 75265

 

Dear Mr. Frisinger:

 

We are writing in response to the recent article entitled "Annuity seems silly for Roth" by Scott Burns which appeared in The Dallas Morning News on January16, 2003.  We believe the article provides an incomplete analysis and could, therefore, potentially mislead your readers about variable annuities, a valuable financial product that is helping millions of Americans prepare for retirement.

 

The article states that "[U]sing a variable annuity in a Roth IRA is as silly as using a variable annuity to fund an IRA, 401(k) or a 403(b).  There is no need to add the expense of insurance contract tax deferral to a plan that is already tax-deferred or tax-free."  In fact, variable annuities offer a wide range of insurance benefits not offered by other investments that can make them appropriate for many people for use in IRAs and qualified plans.

 

The death benefit mentioned in the article 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. A number of 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.  It gives people the confidence to stay invested in the stock market   where the highest returns have historically been since they know their family will be protected against financial loss if they die when the value of their investment has declined. 

 

Guaranteed minimum living benefits also provide real value for purchasers of both qualified and nonqualified annuities.  Guaranteed minimum income benefits entitle contract owners to annuitize their contracts after a specified period based on the greater of the actual value of the annuity or a payout base.  The amount of the payout base varies depending on the annuity but typically is equal to the amount invested credited with a competitive rate of interest. This option provides people with a guaranteed minimum monthly payment for life, without regard to actual investment results.  

 

Another form of guaranteed living benefit offered by some variable annuities does not require annuitization and promises that the account value will, if necessary, be increased to equal the guaranteed minimum account value after a certain amount of time. The guaranteed minimum account value typically equals the total premiums less prior withdrawals, sometimes with a minimum rate of interest. 

 

The article questions whether insurance companies will be able to "make good" on these living benefits.  We disagree with this concern.  While NAVA has long recommended that people considering the purchase of an annuity should review the financial soundness of the company issuing the contract, the insurance industry as a whole continues to be financially strong, highly rated by the rating agencies and capable of fulfilling the guarantees contained in the annuity contracts.  

 

Finally, the article virtually ignores another unique benefit of annuities, the ability to annuitize and obtain retirement income payments that are guaranteed to last for the life of the owner.    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.  With people living longer and Social Security and pension plans projected to play diminishing roles, this annuitization guarantee of income payments that cannot be outlived is increasingly important as individuals fear running out of money during their lifetimes.  Annuities are the only financial product that can provide lifetime income.   

 

Additional research may have revealed to Mr. Burns that variable annuities were specifically designed for the qualified market and have been recognized by Congress in specific sections of the Internal Revenue Code to be legitimate funding vehicles for qualified plans.  Their use in this market is both long-standing and widespread.  

 

 

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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,

Michael P. DeGeorge

General Counsel

 

 

Cc: Scott Burns