Press Responses
November 12, 1999
Mr. Ned CrabbsLetters Editor
The Wall Street Journal
200 Liberty Street
New York, NY 10281 Dear Mr. Crabbs: We object to "Lawyers Seek Class Action Against Insurers Over Annuities," by Deborah Lohse and Bridget O'Brian in The Wall Street Journal's November 9, 1999 issue. The article contains inaccurate statements concerning variable annuities and creates a misleading impression regarding their use in qualified plans. The article cites class action lawyers who criticize the use of variable annuities in qualified plans because "investors are charged higher fees for annuities in part because of the purported tax advantages," which already exist in qualified plans. We strongly disagree with this statement. Variable annuities enjoy tax deferral as a matter of law. Investors do not pay for tax deferral in a variable annuity. The fees imposed by variable annuities go to pay for the insurance benefits the contract provides-such as the death benefit and the right to annuitize the contract-not tax deferral. The article acknowledges these benefits, but then cites "annuity critics" who dismiss them. Again, we strongly disagree. Lifetime Income
Annuitization helps retirees retire on their terms by guaranteeing them payments, which will continue for the rest of their life, no matter how long that is. With people living longer and longer, this is an important benefit that only annuities provide. And, since variable annuities allow policyholders to base the amount of their annuity payments on the investment experience of underlying equity funds, their payments can increase, even in retirement. As more and more baby boomers approach retirement, variable annuitization will become an increasingly attractive choice for retirement planning. In fact, a recent survey of non-qualified annuity owners by the Gallup Organization reported that 77% of survey respondents said that the ability to choose a guaranteed income for life was a "very" or "somewhat" important reason for purchasing their annuity. Death Benefit
The article cites annuity critics who question the value of the death benefit since it is "rare for [it] to kick in." This statement demonstrates a fundamental lack of understanding of the nature of insurance. When an individual purchases an insurance contract-be it life insurance, disability insurance or whatever-what he or she is really buying is protection against economic loss. However, that loss does not have to be realized for the protection to have value. No reasonable person would say that an individual who purchased a homeowners policy made a poor decision simply because his or her house never caught fire. Hindsight is always 20/20, but, unfortunately, people don't have the benefit of it when making important life decisions. Death benefits provide real protection-they guarantee that if the policyholder dies while still saving for retirement, his or her heirs will receive at least 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 "stepped up" benefits that lock in investment gains every few years or even every year. The guaranteed death benefit gives policyholders the confidence to invest in the stock market, which is important in order to keep pace with inflation, since they know that their family will be protected against financial loss in the event of an untimely death. NASD Notice
Finally, the article provides incomplete information about an NASD notice issued in May relating to the sale of variable annuities. The article cites the notice (which sets forth recommended guidelines not requirements) as stating that representatives "should conduct an especially comprehensive suitability analysis" before recommending a variable annuity in a tax-deferred plan. The notice actually stated that a representative "should conduct an especially comprehensive suitability analysis prior to approving the sale of a variable annuity with surrender charges to a customer in a tax-qualified account subject to plan minimum distribution requirements (our emphasis)." The article also fails to point out that thedelines identify benefits provided by variable annuities that can make sales within tax-deferred retirement plans entirely appropriate. In short, the NASD guidelines recognize that the suitability of a variable annuity for any customer is a factual determination that must be made for each sale. Note: 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 a legitimate funding vehicle for qualified plans. Their use in this market is both long-standing and widespread. Millions of Americans have chosen to invest their qualified plan savings in variable annuities. We believe these Americans recognize the benefits variable annuities bring to their retirement plans, and have chosen wisely. Sincerely,
Mark J. Mackey
President and CEO
National Association for Variable Annuities (NAVA)
Reston, VA
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Phone: 703-707-8830 · Fax: 703-707-8831