Press Responses
March 24, 1999
Mr. Ted MillerEditor
Kiplinger's Personal Finance Magazine
1729 H Street, NW
Washington, DC 20006 Dear Mr. Miller: I am writing with respect to an article titled, "Boy, Have They Got a Deal for You," by Kimberly Lankford, in the April 1999 edition of Kiplinger's Personal Finance Magazine. The article asserts that since the change in the capital gains tax rate, variable annuity companies have fought back by adding "features that have nothing to do with taxes." It also states that "although variable annuities can pay off in very limited circumstances..., most investors will do better buying and holding mutual funds outside rather than inside this tax shelter." It may surprise you to learn that enhanced death benefits, which are listed in the article as new features that were introduced in response to the change in the capital gains tax law in 1997, have been in existence for many years prior to 1997. Also, notwithstanding the article's assertion to the contrary, the death benefit provides valuable beneficiary protection that many investors regard as vitally important. No one can predict if they will die when the market is up or down. Even though the stock market has historically been an excellent investment for long-term growth, it is important to remember that, at any given point in time, the market can be down. 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. The article states that "the death benefit...usually costs more than $1,000 for a $100,000 account..." This fee is known as the insurance charge, and it includes much more than death benefit protection. Variable annuities provide payout options that can protect individuals from outliving their assets by guaranteeing them retirement income that will continue for the rest of their life, no matter how long that is. And, since variable annuities allow policyholders to base the amount of their annuity payments on the investment experience of an underlying equity fund, they are an ideal choice as a hedge against inflation. Even with modest investment returns, variable annuity payments can increase over the years, for as long as one lives. Another insurance benefit provided by variable annuities is that the annuity purchase rates are guaranteed for the life of the contract. This means that by purchasing an annuity today, the owner may elect a lifetime income payout option when he or she retires at today's purchase rates. Given the significant changes that can occur over time with respect to the economy, longevity and the insurance company's costs of doing business, the guaranteed purchase rates are a valuable benefit provided by variable annuities. If life spans increase during the accumulation period, the guaranteed purchase rates may produce larger monthly payments than would the current or "immediate" annuity rates when the policyholder annuitizes. On the other hand, if the rates being offered to individuals who purchase immediate annuities are more favorable than the guaranteed purchase rates, the policyholder can annuitize using immediate annuity rates. In effect, the policyholder is in a win/win situation. The article asserts that variable annuities must be kept "at least 15 years . . . for the benefits of tax deferral to make up for the higher taxes and fees." This assertion is not supported by a 1999 study prepared by PricewaterhouseCoopers (PwC), which compares mutual funds to variable annuities after the most recent change in the capital gains tax law. The PwC study reports that for the average of all types of variable annuity and mutual fund investments and under a range of payout options, the longest break-even holding period is less than 5.3 years, substantially less than the 15 years claimed in the article. The study also reports that for the average variable annuity and mutual fund investment, based on historical investment performance of funds for an 11-year period (1987-1997), the after-tax payouts funded by variable annuity investments are substantially larger than mutual fund investments for holding periods as short as 10 years. The PwC study concludes that "variable annuity investments are frequently a more attractive investment relative to mutual funds for long-term savers" (our emphasis). In other words, empirical data from this objective study show that if variable annuities are used as intended-as long-term retirement savings vehicles-they will pay off frequently, just the opposite of the article's statement that variable annuities "pay off in very limited circumstances." No product is perfect for everyone, and investors need to understand fully their alternatives so that they can make their choices based on their individual needs and circumstances. We share a common goal of educating investors about retirement planning and variable annuities. We note that Kiplinger's Personal Finance Magazine does point out circumstances in which annuities "make sense," yet it did not fully examine the various benefits and options that variable annuities provide. We would welcome the opportunity to provide any further information that you may need. Please contact us if we can be of any assistance. Sincerely,
Mark J. Mackey
President and CEO
National Association for Variable Annuities
Reston, VA cc: Kimberly Lankford
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Phone: 703-707-8830 · Fax: 703-707-8831