Variable Annuities - More Perspective

Guest Post by Expert Terry Long

After reading last week's blog by Geoff Winkler, I wanted to add several points based on my experience that I thought would be of value to any reader seeking to understand the annuity marketplace. Protecting elder investors should continue to be a major concern for regulators, and I think it is more important than ever for the features of variable annuities to be understood by those selling and those buying the product (especially elder investors). Based on my experience, three additional items were often considered and discussed during the sale of these products when considering variable annuities as an alternative to mutual funds:   

First, although the insurance company pays the broker a commission, this commission does not generally reduce the value of the policy. With most variable annuity share classes, 100% of the money invested in an annuity goes to work in the policy. This stands in contrast to the oft-quoted complaint that annuity commissions are too expensive. Typically, variable annuity commissions do not reduce the amount deposited into the contract and available for allocation to the sub-account funds. Often, the only time an annuity investor would pay a cost similar to a commission would be if the policy were surrendered early and a surrender charge were assessed. These types of charges are one justification for why annuities are often thought of, and potentially serve best as, long-term investments.

Second, mutual funds which are closed to new money (or otherwise inaccessible to the investor) may still be available within a variable annuity contract. Contract owners can also easily move money between one investment option to another with no tax consequences or commissions charged. Some limitations to the number of allocation changes may exist before a transaction fee is charged, but the deferral of taxes does not exist in a standard portfolio of mutual funds.

Lastly, in the case of elder investors, the variable annuity death benefit may be the only form of portfolio insurance obtainable by the customer. If the customer is in poor health or advanced in age, traditional life insurance may not be readily available, or can be prohibitively expensive. If the customer were to die during a period of market decline, the estate could end up receiving an amount less than the principal contributed. Typically with a variable annuity, the estate would receive either the initial investment or the appreciated value (generally whichever is greater). This benefit is available within variable annuities, usually without any underwriting requirements.

To reiterate, protecting elder investors ought to be of utmost concern to both regulators and those working in the financial services community. With that said, there are many valuable positives associated with an investment in an annuity that should not be ignored, especially by elder investors.