VAs Will Survive The Current Financial Climate
During the past few weeks, we have received an increasing number of telephone calls from various financial reporters asking us what we think of the current status of variable annuities in light of the severe downturn in the stock market.
The tragic events of the September 11 have only served to increase the number of such inquiries.
It is no secret that new VA sales are significantly down from levels a year ago and even more from the halcyon days of the 1990s.
Moreover, it appears that redemptions and tax-free exchanges of VAs are also at a very high level. And we are hearing that the recent drop in interest rates has caused a lot of insurers on the fixed annuity side to be reluctant to offer their products, making it so that future fixed annuity sales probably wont offset the VA downturn.
Thus it is that even as VA sales are tied to the trends in the stock market, so are sales of fixed and market value adjusted annuities tied to trends in interest rates.
Does this mean annuities across the board have a questionable future? We do not think so.
Clearly, the short-term outlook is not bright. Consumer confidence–which affects sales of annuities just as it does sales of toasters, refrigerators and automobiles–is currently lower than it has been for quite a while. Yet, this too will change as the economy turns around and as Americans bear up to the changes in our lives wrought by the events of September 11.
Annuities–and particularly variable annuities–will survive the current financial climate. We say this for several reasons.
First, a VA accomplishes financial goals for its owner that cannot be provided by any other financial product. Only a VA can provide retirement income that cannot be outlived, combined with the long-term potential to hedge against the ravages of inflation.
Second, a VA, like all annuities, provides important tax-deferral advantages to enable retirees to maximize investment growth with investment funds that would otherwise have been paid in taxes.
Many pundits of the financial press criticize VAs because they believe they are too costly for the benefits obtained. These folks believe everyone is as smart as they are, has full access to all investment and financial information, and will always make the right decisions. Further, they believe everyone is able to manage his or her finances in such a way as to be able to live on the investment income from ones own large portfolios upon reaching retirement.
If only those “beliefs” were true!
The truth is that the vast majority of us need help in planning for our retirements. We have neither the time, knowledge, nor skill to set aside investment funds to enable us to retire solely on the investment income from our portfolios.
Instead, we will probably have to depend on a combination of Social Security, employer pensions (if any) and the use of both principal and investment income to fund our retirements. Hopefully, we will not have to rely on the charity of our relatives when we reach that age.
When we consider that none of us knows when we will die, we can have no idea how much of our investment principal we can use each year during our retirement in order to ensure we do not run out of funds.
Conventional wisdom seems to believe that the average consumer does not truly understand annuities. This holds for the proposition that annuities are bought solely for the tax-deferral that is inherent in the product.
Yet, as we travel the country speaking to industry, professional and consumer groups, we are gratified to find that people really do understand the fundamentals of annuities–a product that guarantees that retirement funds cannot be outlived.
However, most of the people with whom we speak do not understand that depending on retirement funds that are distributed over life expectancy is folly.
When we point out that half of us will outlive the life expectancy tables, those who have IRAs or pensions where distributions are based solely on life expectancy are appalled that they have a 50/50 chance of outliving their assets.
Certainly, there are those who are so fortunate that they will have such vast resources when they reach retirement that they need not worry about how long they may live.
We believe these fortunate few are so few that their concerns do not relate to the rest of us. The rest of us must buy insurance against living too long–the definition of an annuity.
It is this basic fact that will keep the annuity industry healthy. Short-term economic conditions will always impact sales of any financial product in the short term.
However, it is basic to the correct use of annuities that they are long-term investments. They are the type of product that, once purchased, should be put aside and forgotten until the time for retirement. At that time, decisions must be made about how much of the annuitys value should be allocated to fixed and variable payouts.
Concern about annuities in the short term will usually lead to incorrect long-term decisions.
So long as the time of death remains unknown to us, there will always be a place for annuities–both fixed and variable. No rational person, looking ahead to the unknown future can afford to neglect planning for an extended retirement. This planning must include fixed and variable annuities in order to provide the protections that only such products can afford–the certainty that retirement funds cannot be outlived.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are principals in the Westport, Conn. and Ft. Lauderdale, Fla. law firm of Blazzard, Grodd & Hasenauer, P.C. You can e-mail them at [email protected]
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.