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.
