Press Room
Press Responses

May 22, 2000

Letters to the Editor
The New York Times
229 West 43rd Street
New York, NY 10036

Dear Editor:

We are writing in response to the article entitled "In Some Annuities, Free Money (With Strings)," by Joseph B. Treaster, which was published in the April 9th issue of The New York Times. We are concerned that the article does not paint a full picture and, as a result, does not present your readers with adequate facts to evaluate an important new financial product.

Variable annuities have been developed to address a full range of personal investment and retirement planning needs and objectives. By design, there is a full choice of products with different benefits, features and costs. Some of the new features available are enhanced death benefits, guaranteed minimum income benefits, and long-term care benefits. Moreover, the variable annuity industry is constantly introducing innovative product features to ensure that these products provide a comprehensive retirement planning solution to millions of Americans.

The purchase payment credits, or "bonuses," offered by some variable annuity contracts are similar to other innovative variable annuity features in that they benefit some, but not all, investors. Financial professionals who sell variable annuities work with their individual clients to evaluate bonuses and other features of variable annuities to determine the most suitable annuity product given the specific financial needs and objectives of that individual.

Bonus annuities are designed to increase the assets at work in a contract up front by having the insurance company advance some future earnings in the form of a payment supplement or enhancement when a premium is paid. With more money at work, the annuity shows greater increases in value given percentage gains in the underlying portfolios. The credit amount also provides a cushion in down markets.

Bonus annuities can be appropriate for individuals in a number of situations, including the following:

Individuals invested in certificates of deposit or mutual funds with back-end sales loads, who face a withdrawal charge or penalty if they move to a variable annuity that may be more suitable for the investor based on any number of factors.
Individuals who own fixed annuity contracts that may have remaining withdrawal charges, but want to invest in a variable annuity with the opportunity for capital appreciation and faster accumulation of retirement assets.
Individuals in products with remaining withdrawal charges and where services in the products, or investment performance, has been poor.

In short, bonus products can be appropriate investments, depending on the individual purchaser's circumstances. Unfortunately, the article provides incomplete information about bonus annuities and, as a result, does not provide your readers with a good basis for evaluating these products.

Fees

Contrary to statements contained in your article, increased fees are not the only source of money used by insurance companies to pay bonuses. In addition to increasing charges, the surrender charge can be increased and the period during which it applies lengthened, commission payments can be reduced, and the insurance company's profits can be reduced. Just as importantly, any cost differential that exists between bonus and non-bonus products can be due to a number of factors unrelated to the bonus.

For example, the article compares ending accumulation values for a bonus contract issued by one insurance company with a non-bonus contract issued by another company, assuming a 10% return and a 65 basis point expense differential. The article concludes that an investor would be better off in the non-bonus contract. However, a closer look at the VARDs data used in the example reveals that 19 basis points of this differential (almost one-third) is attributable to differences in the underlying fund expense ratios for the two contracts. It is simply misleading to suggest to your readers that this differential is attributable to the bonus aspect of the contract.

At least part of the remaining expense differential is due to the enhanced death benefit of the bonus contract. The non-bonus contract offers an enhanced death benefit - but only for an additional charge of 15 basis points. The article's oversimplified illustration underscores the need to carefully analyze all aspects of variable annuity contracts to determine whether their features and protections are suitable in light of the financial needs and objectives of the purchaser. This is why trained financial professionals who sell variable annuities earn commissions.

The results would have been significantly different if the Times had compared the bonus contract used in the article's example with the prior generation, non-bonus contract issued by the same company. The expense differential between these two contracts is only 15 basis points, representing the difference between the non-bonus contract's insurance charges of 1.40% versus the bonus contract's charges of 1.55%. In addition to the modest increase in expenses, the company reduced commissions, scaled back the death benefit, increased the surrender charge, and lengthened the surrender charge period of the bonus contract.

A comparison of these two contracts (using the assumptions contained in the article's example) shows that the ending accumulation value for the bonus contract is greater than that of the non-bonus contract for a number of years. This comparison, like the example contained in the article, does not take into account the following contractual distinctions:

Amount and length of surrender charge
Differences in death benefits
Availability of other optional benefits

However, this only underscores the point we are trying to make - that it is important to evaluate bonus contracts, like all investments, in light of the financial needs and objectives of individual purchasers to determine if they are suitable investments.

Market Conduct

The article suggests that bonus products are by and large being sold improperly. As we have noted, bonus contracts are appropriate programs for their intended market. And we would certainly agree that broker/agents have a responsibility to be knowledgeable about the contracts they are offering, and are recommending them based upon full disclosure and proper suitability guidelines. Bonus products are not right for everyone, and NAVA supports the efforts of regulators and industry participants to ensure that the products are being sold correctly. However, the article's assertion that the insurance industry has undertaken a "new campaign" to "pitch" bonus annuities as a way of getting "FREE money" is clearly unwarranted and unsubstantiated.

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 and CEO
NAVA