Variable Annuities and the Falling Dollar

Provided By

Variable annuities are a popular investment option, especially for conservative investors who want insurance against the risk of a falling dollar value.

Premiums paid by holders of variable annuity contracts are invested largely or entirely in common stocks, instead of the debt securities that are the basis of ordinary annuities. From retirement to death, the holder of a variable annuity gets an income that varies with the value and income obtained from investment in equities rather than the fixed number of dollars guaranteed by other types of annuities. The fundamental rationale of variable annuities is that of providing protection against the decline in the purchasing power of the dollar.

Two major life insurance companies have been in the forefront of the battle over the granting of legislative approval for life insurance companies to sell variable annuities. Prudential Insurance Company, the second largest life insurance company, led the proponents, arguing that the built-in inflationary tendencies in the economy and the experience of the past two decades proved conclusively that recipients of a fixed sum in dollars were bound to suffer because of the rise in the cost of living.

In the decade 1951-1960 alone, the Consumer Price Index of the United States Bureau of Labor Statistics rose from 111.0 to 124.6 (1947-1949 = 100). This meant an average loss in purchasing power of about 2.5 percent annually (in 1950, the year of the Korean invasion, the index was only 102.8). Long-term inflationary trends also accounted for much of the advocacy of the purchase of common stocks and investment company shares in recent years.

Pitted against the sale of variable annuities by life insurance companies is the nation's largest mutual life insurance company, the Metropolitan Life Insurance Company. Its position is that under standard forms of contracts issued by life insurance companies the company assumes the risk. Under a variable annuity contract, however, the risk is transferred to the purchaser, a practice completely contrary to the traditional philosophy of the life insurance industry. The confidence in life insurance so carefully nurtured over the years and so priceless an asset, it is contended, might be seriously impaired in the event of a protracted decline in common stock prices.

A major departure from traditional practice was taken by the Teachers Insurance and Annuity Association of America (TIAA) in setting up the College Retirement Equities Fund (CREF). In 1952, this was established jointly with TIAA. College professors could divert up to half of their retirement contributions into a variable annuity kind of contract. Differences between CREF and the sale of variable annuities by commercial life insurance companies to the general public through commission agents are: a clientele more highly selected as to educational attainments and, presumably, as to understanding of the contract; a continuing limitation imposed on the proportion of variable to total annuity premiums; stability of income enjoyed by faculty members of institutions of higher education; absence, because of the limited number of participants, of problems growing out of potential economic power through ownership of equities with voting rights.

A number of other groups, including the New York Stock Exchange, the Investment Bankers Association of America, The Investment Company Institute, and the National Association of Securities Dealers, argue that a variable annuity contract is, in essence, an investment company share in disguise.

At this writing, it is too early to judge the impact of the sale of variable annuity contracts by life insurance companies. Provided that the buyer knows the facts and is aware of the risk involved, variable annuities seem to have a valid place in the plans of investors.

This article is a small snippet from

"At Last! Discover How YOU Can Become An Investment Pioneer By Investing Your Money Easily And Safely With Using A Long Lost Formula"

Find Out More About and Asset Protection Services

copyright 2007