October 27, 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 "The choice should be as easy as A, B, C; In a black box comparison, the average variable annuity loses" by Scott Burns which appeared in The Dallas Morning News on October 14, 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.

 

By drawing a snapshot comparison of variable annuities and mutual funds, the article completely ignores the tax deferral feature of the annuity product. Yes, variable annuities generally have somewhat higher fees than mutual funds (although, of course, there are variable annuities with lower fees than many mutual funds), but 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.   

 

Moreover, the additional fees pay for the insurance features offered by variable annuities (which are also 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 can not be overstated. Annuities are the only financial product that provides this guarantee.

 

Mr. Burns concludes by stating that his reason for writing his negative article about variable annuities is because sales “continue to run at a $120 billion annual rate”. We submit that one of the main reasons for the robust sales of variable annuities is the insurance benefits of the product. Notwithstanding Mr. Burn’s views to the contrary, many people believe that these benefits are extremely valuable and well worth their cost.

 

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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: Scott Burns