Insurers May Be in for More Misery (Update)

Response from American Equity Life Insurance Co.

A response to this article, submitted by Marla G. Lacey, vice president, associate general counsel, American Equity Investment Life Insurance Co., is below.

A deferred annuity is a contract with a life insurance company which accumulates funds for retirement on a tax-deferred basis. A deferred annuity may also provide guaranteed income for life or for a period certain such as five or 10 years. There are three basic types of deferred annuities: variable, traditional fixed and fixed indexed. Most deferred annuities have no up-front sales charges.

A variable annuity is an insurance product which is considered to be a security, is required to be registered with the SEC and is sold only by securities registered individuals. A variable annuity typically has a variety of investment fund selections which operate much like mutual funds - the profit and loss of the assets (typically stocks or bonds) of the individual fund are passed through to the holder of the variable contract. As such, the contract holder has direct participation in securities markets, with the potential for market gains as well as losses.

While some variable annuities now offer a type of income guarantee available by rider, most if not all of the investment risk underlying the contract is passed on directly to the contract holder, and the holder is charged an annual fee to obtain the benefit of the guarantee. The investments underlying the variable annuity fund selections are managed in a separate account; in other words, they are not assets held in the insurance company's general investment account.

A traditional fixed annuity carries a declared interest rate which is payable for a specific period of time. In many cases the declared interest rate may be raised or lowered by the insurance company on an annual declared basis for the next contract year. These products contain a minimum guaranteed interest rate to be credited to the contract as specified by state law, typically in the 1% to 3% range depending upon a particular state's requirements.