Executives See Future For Industry Despite Tax Changes

Will the new sweeping tax relief provisions set the variable annuity industry's death knell ringing? Industry executives and analysts suggest that despite dire predictions, it isn't time to purchase the casket just yet.

Weiss Ratings, Inc., the ratings agency of Palm Beach Gardens, Fla., sounded an alarm in a late June announcement when Martin Weiss, chairman of the firm, said he expected the tax changes recently signed into law to bring misery to the variable annuity market.

Moreover, Weiss predicted that companies that rely wholly or in large part on variable annuity products face the greatest risk. 'Since consumers generally contribute the maximum pre-tax amount to their IRAs and 401(k)s before purchasing variable annuities, this increase in the contribution level will likely hurt variable annuity sales,' Weiss said.

But not everyone agrees. 'I don't think you'll eliminate annuities altogether,' said Scott Bordelon, CFP, with Financial and Investment Management, a financial planning firm in Covington, La. The tax law changes definitely provide some very meaningful tax benefits, he said. And Bordelon recommends that clients max out their tax-deferred retirement plans, such as 401(k)s and IRAs, first, before looking to variable annuities.

But beyond retirement plan savings, a tax-deferred annuity might be ideal, he said.

Variable annuities offer features that qualified retirement plans don't, including the death benefit guarantee and other optional add-on features, such as critical care insurance.

And if insurance companies see their annuity business taking a turn for the worse, it probably won't be because of the tax law changes, said Arthur Fliegelman, senior credit officer with Moody's Investor's Service in New York. 'There are probably only a handful of companies that really make money in the variable annuity business right now,' he said. 'For some, getting out of the business might be a good thing.'

What will really determine the outcome for the VA industry will be how the brokers and distributors who sell VAs respond to the tax law changes, said Carole Ann King, assistant manager of corporate research and analysis at AM Best, the insurance ratings company in Oldwick, N.J. 'Generally the distribution side is very resilient and finds the good side to the tax law changes,' she said.

Adapted from a story appearing in Annuity Market News, a sister publication of Mutual Fund Market News.

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