Tuesday, April 5, 2011

Variable Annuity Vindication

Many of my clients have invested in the Transamerica and MetLife Variable Annuities over the years, so I wanted to refer you to an article in the Wall Street Journal about variable annuities and the Guaranteed Minimum Income Benefit. This rider protects the assets so your account will continue to grow in a down market. The following article by Leslie Scism sums up perfectly the reasons why the variable annuity should be a part of most investment portfolios, and vindicates many advisors who realized there was really no other comparable protection against downside risk.

Long Derided, This Investment Now Looks Wise

by Leslie Scism

One of the best investments of the past decade was one of the most derided: the variable annuity. But investors who want in on the action now are in for a shock, as the juiciest deals have disappeared from the market.

Variable annuities, a tax-advantaged investment account that holds a type of mutual fund, are sold by insurers, and most offer some form of investment guarantee for an additional fee. For years, they were attacked for being too expensive. Why pay for a guarantee to protect against a stock-market decline, the argument went, when stocks continued their inexorable march upward?

Then stocks plunged, and variable-annuity guarantees no longer looked expensive. In fact, insurers, in a move to build market share, had underpriced many of them. Suppose an investor owned a variable annuity that tanked in value last year. No matter. Under the most-generous contracts, insurers pledged to pay customers lifetime retirement income based on past market gains in their underlying funds, plus minimum annual increases in years the market is sluggish or down.

Because of such guarantees, many holders of variable annuities actually saw their accounts increase 6% or more in value last year, when the Standard & Poor’s 500-stock index dropped nearly 39%.

“When I watch friends bemoaning the market, I feel guilty saying anything, actually,” says Amy White, a 67-year-old retired accountant in Dallas. She and her late husband invested hundreds of thousands of dollars in variable annuities early this decade, and their funds rose as the market neared its 2007 peak. While they fell last year, the guaranteed amount—on which Ms. White’s retirement-income checks will be based—is still more than double the invested amount.

Click here to read the rest of the article

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