Many in the variable annuity industry have been telling customers this all along: One of the greatest advantages of owning variable annuities is that you can move your investments within your VA between stock, bond, money market and fixed accounts, all with “no current taxation.”
Today, industry statistics are proving that point emphatically.
Recent figures show that VA investors moved more than $15 billion out of equity subaccounts in July 2002. What happened to those dollars? Most experts agree that those liquidations were recaptured in bond and money market subaccounts and, increasingly, in fixed accounts. In addition, net exchange activity out of equity funds and into other funds in the same fund family rose dramatically in July. (Source: Investment Company Institute, Washington, D.C.).
The bottom line: Investors who, over the past years, purchased VAs that have both fixed and variable subaccounts are counting themselves among the fortunate.
Not only can they make tax-free exchanges among fixed and variable options in their VAs; they can make them in both directions–out of variable investment options and back. Those who saw the wisdom of owning such VAs have asset allocation flexibility today, which they can exercise without current income tax consequence.
VA investors can also take advantage of rebalancing programs to stay on track with their asset allocation plan, which is typically designed to increase expected return and reduce risk. In fact, many VAs today allow investment professionals to provide valuable asset allocation models and periodic portfolio rebalancing to the client. Once again, rebalancing, like other annuity subaccount transfers, occurs without current income tax consequences.
That is the kind of flexibility that makes it possible to change strategies when investors needs or objectives change, or when world events cause clients to rethink their risk tolerance.
Some of the most innovative VA risk management programs available today provide computer models to automatically shift investments between fixed and variable accounts and can even guarantee no loss of account value over a specified period. Other new programs require annuity owners to invest in a specific asset allocation model and stick with the program for years to get a principal guarantee.
In either case, VA investors are able to take advantage of some of the latest risk reduction strategies.
Today, not only do clients have renewed appreciation for the opportunity to make transfers on a tax-deferred basis inside a VA; they also have renewed appreciation for VA death benefits.
During the 1990s, it was common for consumer finance journalists to diminish the value of VA death benefit features. Now, two-and-a-half years after the NASDAQ bubble burst, VA owners who have those benefits are extremely pleased they do–and the journalists who complained about those benefits are suddenly silent.
In addition, contract owners today have greater appreciation for the VAs promise to allow them to convert their accumulated annuity value into a stream of guaranteed lifetime income payments.
The steady background for all of this renewed interest is, of course, the constant media buzz about the rocky stock market, with seemingly endless negative corporate stories. That, combined with real domestic and international concerns, has put us into the second year of having to handhold clients and continually remind them of the long-term benefits of investing.
Despite all that, investment professionals who have sold VAs in the past can be proud of the fact that their investors have valuable choices today–choices such as tax-free transfers among the VA accounts and a death benefit. Investment professionals can also be proud of the fact that VAs are offering the very tools investors need to adjust to changing markets: dollar cost averaging, asset allocation, and now even programs that guarantee their account value in the future.
is vice president–variable annuity marketing at American Skandia, Shelton, Conn. His e-mail address is firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 2002. Copyright 2002 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.