Variable Annuities: More Than Just Tax-Deferral

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On reading his obituary, Mark Twain quipped, “The reports of my death are greatly exaggerated.” The same might be said of published reports of the death of the variable annuity following the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003. To the contrary, the VA–which has always been a hybrid product combining elements of both investments and insurance–is alive and well, helping clients manage risk as they plan for retirement.

Now some financial pundits charge that whatever advantage a VA once offered–narrowly described as tax-deferral–is gone. Mistakenly, your prospects may reject your recommendation to buy a VA based upon that very narrow view, and some current owners may second-guess their purchase decision.

But the benefits of owning a variable annuity are much greater than simply tax-deferral. The greatest risk retirees face is not taxes but rather outliving their assets.

Today, managing money is all about managing risk. In the wake of a severe three-year bear market, the likes of which many investors have never before experienced, people now understand this risk and the importance of managing it. A VA can transfer investment (through death and living benefits) and longevity risk (through the lifetime payment features) from the owner to the insurer.

While an annuity may not be right for everyone–short-term investors, for example–it does provide an opportunity for both the accumulation and distribution of a retirement nest egg, a process which for many investors might span a total of 20, 30, even 50 years or more. What makes an annuity unique isnt tax-deferral; annuity-specific expenses, after all, do not pay for tax-deferral. Rather, the uniqueness of a VA lies in its ability to guarantee that you wont outlive your assets.

Its important for planners to help prospects and owners focus on the unique benefits of owning an annuity. Three broad categories of distinctive, guaranteed benefits above and beyond tax-deferral include living benefits, death benefits and income management.

Living benefits. While investment opportunity and the potential to grow wealth are attractive features of a VA, poor performance is a risk prudent investors want to manage. Many prudent VA investors manage this risk through the application of fundamental investing principles such as asset allocation and dollar cost averaging. But, after three years of negative stock market performance, some jittery investors want an extra dose of risk control, and living benefits–such as guaranteed minimum income and account values–are often the solution to getting them refocused on getting in and staying in the market.

Variable annuity living benefits provide investors with perhaps one of the most important ingredients to investing success: the confidence to remain invested for the long term. They provide this by letting investors know today their worst-case scenario in the future, which, in turn, can be part of the long-term planning process.

Death Benefits. During the accumulation phase, annuity death benefits offer annuity owners several ways to protect their heirs against investment losses should the owner die when the markets are down. Typical death benefits vary from guaranteeing that heirs receive no less than the principal amount invested, to paying heirs the highest anniversary contract value.

The most important reason for selecting an annuity death benefit is for the confidence it may inspire in the annuity investor to invest according to his or her goals and needs vs. worrying about what will be left for heirs should there be an unexpected death.

Income Management. A VA can significantly boost retirement security by guaranteeing a lifelong stream of income payments. While the amount of each payment will vary with the performance of the underlying investments (if a variable payment is elected), the stream of income will continue for the life of the annuitant. Most importantly, when income payments begin, the insurer assumes the longevity risk–not the individual. The annuitant is relieved of the worry about living too long and prematurely liquidating a retirement nest egg.

Step back for a minute and think about why a stream of payments guaranteed to last a lifetime is so important. Other than Social Security, fewer Americans than ever before have defined benefit pension plans that guarantee lifetime income, or have worked for an employer offering a defined benefit plan long enough to qualify for a meaningful benefit.

More likely than not, many Americans approaching retirement are on their own in preparing for their income needs. Americans need to “define their own benefit,” and an annuity offers a distinctive and viable method for doing just that.

Ultimately, guarantees are only as good as the financial strength of the issuing insurer. Considering how long your clients may depend upon an annuity, first to accumulate money and then to receive income, a 50-year relationship may not be unusual.

Many publicly held insurers today, in their desire to produce the short-term results Wall Street craves, have suffered financially from the impact of the recent economic downturn. The stronger the insurer and its ability to honor potential future obligations, the more value an investor may place on the annuity and the issuing company.

is national sales manager for Mass Mutuals annuity division, Hartford, Conn. He may be reached at DFoster2@massmutual.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 4, 2003. Copyright 2003 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.