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.