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.
