From the April 2008 issue of Boomer Market Advisor • Subscribe!

April 1, 2008

Become a VA believer

When I was asked to write an article that would fit in Boomer Market Advisor's annuity issue, I wondered if it was possible to moderate my own bias in favor of a reasoned, balanced assessment of the popular investment vehicle. After all, there are those who argue that variable annuities, in particular, are egregiously expensive and more beneficial for salespeople than investors.

In some respects, the criticism of VAs is a microcosm of an ongoing dispute within the investment world. It pits the expense hawks against the interpreters of human nature and emotion. There are believers and there are nay-sayers. There are no agnostics.

After reflection and a career-long period of experience, count me among the believers. It is true that the costs of buying and owning an annuity are considerable. It is true that the use of VAs in a qualified plan provides redundant tax benefits. However, consider the following:

1. The tax advantages for non-qualified investors are substantial. This does not simply refer to the tax-deferred compounding that occurs within an annuity. It refers to the ability to freely move between various portfolios, reflecting the changing and evolving goals that we experience during our life. For the nervous investor who cannot sleep at night unless he or she moves some greater portion to cash, such a move does not create a taxable event. I know some very savvy investors who are good at buying but poor at selling, because of the negative tax consequences. They would have much better success if they could manage their portfolios in a VA environment.

2. My friend Larry tells of his client who accumulated (only) $100,000 in his retirement plan. The entire amount was rolled over into a VA when he retired in 1999.The account performed poorly. Additionally, he made substantial withdrawals that reduced the account to a value of only $4,000 when he died. His widow found the remainder would barely cover funeral costs. However, when he died, the VA insurance component provided a $40,000 payout which enhanced his widow's income by nearly $200 per month. And the wide range of riders and permutations that are available with VAs permit solutions for a broad range of special needs.

3. Annuities of all sorts, variable and otherwise, are being used (more than ever) to create predictable income for those who need it. Predictability is critical.

4. Here is the aspect to which I, as a "believer," am most drawn. It is the very same perspective that causes the non-believers to be most critical. It is that back-end charges discourage liquidation. Investors are skittish by nature. They react to yesterday's news. Anything that leads to greater long-term commitment helps lead to success. Am I disrespecting the investment sophistication and maturity of the average investor? Absolutely! To do otherwise is na?ve and ignorant of human nature.

Those who think VAs are simply a matter of cost analysis are jamming their fingers in their years and chanting "I can't hear you" over and over. The challenge for investment professionals is to help their clients succeed. "Atheists" fault the structural costs of VAs. "Believers" focus on the investors and their needs.

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