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Annuities Under Fire: Are The Attacks Deserved?

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Annuities–whether fixed, variable or equity indexed–have been the hot products sold by the life insurance industry for nearly two decades. Their sales far eclipse the sales of traditional life insurance products.

Annuities continue today to be the biggest selling life insurance product, despite hurricanes, downturns in the stock market and vast quantities of bad press about the product.

Pundits in the financial and popular press, regulators, and politicians all like to bad-mouth annuities–particularly variable annuities–but with special emphasis on the evils of deferred annuities in general.

Although there is no “official” definition for a “deferred” annuity, the industry generally accepts the definition used for federal income tax purposes–i.e., a deferred annuity is one where annuity payments begin more than one year from the date of issue of the contract.

In this context, it is important not to confuse the short description of annuities contained at the bottom of all annuity contracts. These short descriptions often characterize the contract as being a “deferred” annuity.

Nevertheless, it is quite usual for insurers to issue annuities that are characterized as “deferred” even though the contract will be immediately converted to a payout annuity through the issuance of a supplementary agreement that describes the particular annuity option elected by the annuitant.

Therefore, what is important is what actually happens with respect to the onset of annuity payments, not the description on the contract itself.

The confusion about deferred annuity contracts, their use, and their purposes is rampant throughout the media, politicians and the regulators. The common perception is that the only reason why people buy annuities is to defer federal and state income taxes.

This has given rise to litigation and regulatory action against the purported evil of “including a tax-shelter within a tax-shelter” when deferred annuities are used in connection with qualified retirement plans. This, despite the legislative history that mandated that some forms of qualified retirement plans were required to use annuities. [For instance, "tax-sheltered annuities" under Section 403(b) of the Internal Revenue Code mandated annuities as the only acceptable product until 1974; in addition, Section 408(b) of the Internal Revenue Code provides for "individual retirement annuities" as one of the methods to fund an IRA.]

If Congress and the President recognized the value of using annuities in qualified retirement plans, why can’t the media?

If the primary motivation for the purchase of a deferred annuity is tax-deferral of investment income, then why are the vast majority of purchasers of nonqualified annuities of relatively modest means?

Industry studies reported by Reston, Va.-based National Association for Variable Annuities (which, despite its name, represents the interests of fixed annuities as well), indicate that over two-thirds of deferred annuity buyers have annual household incomes below $75,000 per year. This is hardly a group with an overly difficult income tax burden!

Moreover, the group of affluent buyers–those with annual household incomes of $100,000 or more–represents only 18% of total annuity purchases. These are the people with the greatest need for tax-deferral, and yet they are one of the smallest representative groups of annuity purchasers.

If the primary motivation for the purchase of a deferred annuity is not tax-deferral, then what is it?

Again, NAVA’s industry studies indicate that the motivations include retirement income, the provision of a financial cushion in the case of outliving life expectancy, to avoid being a burden to children, and as an emergency fund. These are all the reasons why annuities originally were developed long before there was an income tax!

The “don’t confuse me with facts, my mind is made up” syndrome that seems to be so prevalent in the press does a disservice to the consuming public who are rightfully concerned about providing for their financial futures.

This does not mean that there are not abuses in the annuity industry–there are abuses in every industry, including politics, religion and the media. However, to entertain a blanket condemnation about an entire industry because of a limited number of abuses is the worst form of profiling.

Furthermore, the bulk of the condemnation of annuities does not home in on abuses but focuses on the basic nature of the product! Abuses are a legitimate subject for condemnation–ignorance about the product and generalized assumptions about consumers is not!

Criticisms include allegations that the products are too complicated, too expensive and do not provide any real benefit.

And yet, every day there are massive amounts of publicity about the crisis in Social Security, the lack of a meaningful national savings rate and the continual extension of life expectancy.

If the press, politicians and regulators continue to discourage our citizens from taking action to provide lifetime income, regardless of longevity, through the purchase of a deferred annuity during the working years, the nation runs the risk that the only income protection available for most of working-class Americans will be on the public dole.

Pundits in the financial press are particularly prone to work on the assumption that everyone is as affluent and as well-informed and as disciplined as are they when it comes to financial matters. If this were the case, there would be no need for annuities, for Social Security, for Medicare or for most other programs people rely on for financial security.

Unfortunately, in a country where the average American cannot calculate a 15% tip on a luncheon check, that average person needs all the help possible through forced savings programs and the use of products that guarantee results.

Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Pompano Beach, Fla., office of Blazzard, Grodd & Hasenauer, P.C. Their e-mail address is [email protected]

The ‘don’t confuse me with facts, my mind is made up’ syndrome does a disservice to the consuming public

Primary Motivations

ü To use them for retirement income

ü To provide a financial cushion in the case of outliving life expectancy

ü To avoid being a burden to children

ü To have an emergency fund

Source: Industry studies reported by National Association for Variable Annuities, Reston, Va.


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