It’s not hard to find bad press about variable deferred annuity contracts. It’s quite possible that your clients have heard negative things about these types of investments. Typically, opponents cite high fees and low liquidity as reasons to stay away from these contracts. But when used properly, variable deferred annuities can be a valuable part of a client’s retirement plan.

Following are 10 common objections to variable deferred annuities and how to beat them.

Objection #1: Fixed income investments are safer
On the most basic level, a variable deferred annuity is a contract between the client and an insurer that is intended to be held over the long term for the purpose of generating a reliable retirement income. As a rule, the most basic contracts provide for a return of the original investment, less charges and withdrawals. Many offer enhanced benefits for additional fees. Although variable deferred annuities are not FDIC insured, their guarantees are based on the claims-paying ability of the issuing insurer. Unlike fixed-income investments, variable deferred annuities allow the client to invest in both equity and fixed income markets through a variety of sub-account selections. Furthermore, variable deferred annuities offer a death benefit component, either standard or enhanced, that may be unavailable from fixed income investments; however, these benefits may be offered for additional fees that are not included in fixed income investments.

Objection #2: The tax advantages of a variable annuity are insignificant
One of the most notable variable deferred annuity advantages is tax-deferred accumulation. When properly structured, the owner may delay paying tax on gains until a future date, usually when the owner begins taking payments. This may offer an advantage by offsetting the effect that immediate taxation may have on the growth of the investment.

There are three main tax differences between mutual funds and variable deferred annuities:

1. Under the proper circumstances, mutual fund gains may be treated and taxed as capital gains, while variable deferred annuity gains enjoy tax deferral until they are withdrawn, at which point they are treated as ordinary income. (Mutual funds purchased in a retirement account, IRA, 401(k), etc. also experience tax deferred growth and will be taxed as ordinary income when withdrawn.)

2. Mutual fund losses may be tax deductible; variable deferred annuity losses may not be.

3. If a client has a taxable mutual fund and wants to sell shares of one account and buy shares of another, this is a taxable event. However, with a variable deferred annuity, owners can exchange shares tax-free across all sub-accounts, thereby encouraging efficient rebalancing in accordance with their investment profiles or changes in risk tolerance.

Objection #3: There’s no step up in cost basis
When tax-deferred assets pass to beneficiaries upon the death of the contract holder, taxes due on the earnings can erode the inheritance. A concept called “stretching” allows beneficiaries to withdraw payments from a qualified account or non-qualified annuity over time, rather than taking a lump-sum distribution. Plus, variable deferred annuities do not have a step down in cost basis either, meaning the annuity can be guaranteed through a down market during the owner’s life as well as once it is passed on to the beneficiary.

Objection #4: You have to annuitize to receive benefits
No, you don’t — at least not until the contract’s maturity date. A variable deferred annuity can still be a worthwhile investment even if the owner chooses not to annuitize.

If elected at the time of the contract’s inception, optional living benefits can be advantageous throughout the owner’s life. Enhanced death benefits can also provide security to the beneficiary. Various annuity riders can be purchased that, if properly structured, will provide both income protection and death benefit protection for the annuity owner and their beneficiaries.

Objection #5: Variable annuities force you to give up liquidity
Money that is invested in a variable deferred annuity should not be viewed as illiquid.

Variable deferred annuities are designed to help retirement-minded investors capitalize on tax-deferred growth over the long term. As such, they are intended for people who can invest an amount of money and leave it to work for them for at least a decade. Typically, surrender charges are levied if the contract is terminated during the early years. While variable deferred annuity contracts should not be viewed as liquid assets, they can provide, and are intended to provide, income to the owner during the owner’s life.

Objection #6: Annuities lack investment options
Variable deferred annuities offer a diverse collection of sub-account choices; options include asset allocation portfolios as well as multiple asset classes. The underlying funds are generally managed by third-party investment firms. Some are household names you’re sure to recognize, while others are better known among institutional investors.

An annuity provides access to this array of management talent.

Some investors like to personally select the specific sub-accounts in which they invest. But others prefer asset allocation portfolios, which automatically pull together a group of diversified sub-accounts based on the investor’s time frame, goals, and risk tolerance levels. Either way, variable deferred annuity sub-accounts provide investors with many choices. It’s also important to note that they can rebalance without taxation.

Objection #7: Annuities are too complicated
That’s why it’s important to work closely with your wholesalers. They can help you understand how these products work so you can make informed decisions for your clients based on facts. Wholesalers can provide you with sales ideas, illustrations, and marketing materials, as well as educational materials for your own use.

Ultimately, variable deferred annuities can help build long-term wealth, guarantee future income, and protect assets for beneficiaries. They may not be right for every situation, but their benefits make them worth considering. Together, you and your wholesaler can discuss your needs and your clients’ needs, then evaluate whether a variable deferred annuity may be appropriate.

Objection #8: Annuities aren’t for wealthy people
Although wealthy people may not need the guaranteed income stream an annuity could provide either through annuitization or optional living benefits, they often purchase variable deferred annuities for a layer of asset protection unavailable with other investments.

In fact, the estate planning concerns of the wealthy often lead them to fund irrevocable trusts with variable deferred annuities as a way of leaving a legacy free of estate taxes. Making a current gift to the trust through an annuity removes the gift amount and its future growth from the client’s estate. The trust could also be funded upon the death of the first spouse, thereby maximizing the assets that would be exempt from estate taxes. Consulting an experienced tax advisor is recommended.

Regardless of net worth, most people insure their homes, their cars, and their lives. So wouldn’t it be wise for them to insure their assets, as well? A variable deferred annuity can do just that. Through riders such as the guaranteed minimum income benefit, the guaranteed withdrawal benefit for life, and the guaranteed minimum death benefit, contract holders can take part in market up-swings, lock in gains, and protect against market downturns.

Objection #9: IRAs are no place for annuities
While an annuity should not be purchased in an IRA for tax-deferral reasons, it provides optional features and benefits that could help provide a layer of asset protection that may not be available in other investment types. An annuity allows owners to lock in a living benefit that will provide them with income throughout their lifetime.

Plus, the guaranteed death benefit associated with an annuity may not be available through other IRA investments. The death benefit provides protection for assets that will pass to the owner’s beneficiary.

Objection #10: Variable annuities are expensive
It costs more to own a variable deferred annuity than it does to own a mutual fund, but the difference may not be as much as some think. The average cost differential between variable deferred annuities and mutual funds in 2004 was only 96.2 basis points (0.962 percent), according to the 2005 NAVA Annuity Fact Book. Much of the press coverage exaggerated the difference by assuming that the management fees of the underlying variable deferred annuity sub-accounts were identical to the fees of publicly available mutual funds. In reality, the fees for variable deferred annuity sub-accounts were typically lower.

It is important to remember that the fees associated with variable deferred annuities pay for benefits unavailable in other investments, such as a guaranteed income stream and living and death benefits. Intended as long-term financial tools, annuities that are held for an adequate amount of time compensate for their fees through their tax-deferral advantages.

In today’s market, investment options are plentiful. The strategies within which they fit can be as unique as the people they are created for, and clients may feel overwhelmed by the multitude of choices and opinions available. If your client’s needs indicate that a variable deferred annuity might work within their plan, help them better understand the truth about these products so they can make an informed and appropriate decision.

L. Kelly LaVigne, JD is vice president of AXA Distributors’ Advanced Markets Group. He has an extensive background in advanced markets sales consultation. He can be reached at kelly.lavigne@axadistributors.com or 860-723-1866.