February 26, 2003

 

 

Mr. Dick Satran

Personal Finance Editor

Reuters America, Inc.

3 Times Square

New York, NY 10036

 

Dear Mr. Satran:

 

We are writing in response to the recent Reuters article entitled "Perhaps It's Time to Dump the Annuity."  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.

 

While it is true that the stock market has experienced a prolonged decline, all equity-based products have been affected, not just variable annuities.  Moreover, variable annuities offer a number of investment and insurance features that can help protect against declining markets.         

First, variable annuities offer a wide range of investment portfolios, from stock funds to more conservative investments such as bond funds, balanced funds and money market funds. In addition, most variable annuities offer fixed interest rate accounts.  These accounts give investors the option of allocating some or all of their investment to a guaranteed insurance contract that is free from the investment fluctuations of the stock and bond markets.

 

The ability to choose from a diverse group of investment portfolios and fixed accounts makes variable annuities attractive in all market conditions.  Investors can also use strategies such as dollar cost averaging to establish their investment position during a volatile market and automatic asset rebalancing to maintain their desired asset allocation.  And, investors can transfer money from one portfolio to another within the annuity as often as they want without paying any taxes.  This flexibility allows them to react to changing market conditions, without worrying about tax implications. 

 

The insurance benefits offered by variable annuities also provide valuable protection in a bear market. Beneficiary protection, in the form of a guaranteed death benefit, gives investors the confidence to stay invested in the stock market   where the highest returns have historically been   since they know that if they die when the market is down, their family will receive at least the amount invested.  Many investors consider the death benefit to be vitally important. No one can predict if they will die when the market is up or down, particularly during periods of market volatility. 

 

 

 

The ability to annuitize is another insurance benefit that is especially valuable during a bear market since investors have the assurance that, even if their other investments are down, they will receive guaranteed income payments for the rest of their lives. 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.

 

It is bad enough that the article ignores these valuable features.  Even more disturbing, however, is the simplistic advice given to readers who own annuities that have incurred a loss due to the recent bear market. The article suggests that people should sell their variable annuities in order to qualify for a loss on their income tax returns.  The decision to sell an annuity requires careful consideration of a number of factors in addition to attempting to obtain a tax deduction. 

 

The example cited in the article illustrates the fallacy of considering only the potential tax loss in deciding whether to sell an annuity.  The article cites a financial planner who persuaded a client to sell a variable annuity that had declined in value from an initial investment of $100,000 to $62,000, and invest the balance directly in stocks.  (This seems like inconsistent advice given the market decline). The article supports this strategy by noting that heirs would get an automatic "step up in basis" if they inherited stock and would not have to pay taxes on any gains, while heirs who inherit an annuity have to pay income taxes on any gains in the annuity.

 

However, this "strategy" ignores the fact that if the client cited in the example died shortly after purchasing the stock, his heirs would inherit stock worth only $62,000. In contrast, if the client had held on to the annuity, the heirs would have received at a minimum the $100,000 that was originally invested by virtue of the guaranteed death benefit.  Many variable annuities go even further and offer enhanced death benefits that periodically lock in gains or credit a specific rate of interest. 

 

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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