FUNDS HOPE DEATH BENEFITS WILL EARN SALUTE: ANNUITY SLIP FEARED, SO AMERICAN SKANDIA, SUNAMERICA INNOVATE

With proposed tax code changes threatening to take the wind out of variable annuity sales, all eyes are on SunAmerica Inc. and American Skandia to see whether they can ratchet up their mutual fund sales by offering a death benefit.

Both SunAmerica and American Skandia, a subsidiary of Sweden’s Skandia Insurance Co., are major players in the intensely competitive annuity market.

But as relative newcomers to the retail mutual fund arena, the firms are hoping to drive up fund sales by taking one of the annuity’s most appealing features, the death benefit, and applying it to their mutual funds. The optional insurance offers protection against loss of principal and a guaranteed annual return on original investments, up to a maximum of 200%.

It remains to be seen whether investors will take the bait. But since the insured funds are much cheaper than variable annuities, which can carry annual fees as high as 3.77%, they could make annuities less attractive to many investors.

for the bifocal set

Indeed, the average variable annuity owner is 52 years old, and even the companies acknowledge that insurance on mutual fund investments is likely to appeal mostly to investors over 50 who are skittish about putting their money in stocks. It doesn’t make sense, observers say, for 30-somethings who have time to ride out waves in the stock market.

SunAmerica offers its coverage for 0.2% (or 20 basis points) of assets a year, plus a $25 setup fee. Skandia charges slightly more: 35 basis points a year and a $25 setup fee.

“If there is any public demand for it, it will take all the other (insurance) companies about 30 seconds to copy,” driving down fees as a result, says Colin W. Devine, a senior equity analyst at New York-based Salomon Smith Barney.

But any new players would first have to win approval from state insurance regulators — a tedious process that delayed Skandia’s plans to roll out its product.

The Shelton, Conn.-based firm announced last fall that it would offer insurance on mutual fu
nd investments. But negotiations with Connecticut regulators held up sales until this week, according to the company.

Available in 32 states, it guarantees investors that when they die, their fund accounts will equal at least the original investment and the greater of the following: a 5% annual return or the highest account value on the investment anniversary occurring on or after the 80th birthday of the oldest insured. New investors have 30 days to buy the insurance, but it is not available to existing mutual fund shareholders.

sun slips past

The delay with regulators allowed Los Angeles-based SunAmerica to beat Skandia to the punch by rolling out its mutual fund insurance late last month. SunAmerica’s so-called Asset Protection Plan, available in 27 states, protects the value of initial investments and provides a guaranteed annual return of 4%. SunAmerica also gives new investors 30 days to buy the insurance. But under its program, existing investors have a 120-day window of opportunity.

While SunAmerica and Skandia could cannibalize some of their own annuity sales if the insurance catches on, that may be a small price to pay for a larger share of the mutual fund business.

“They are interested in gathering assets. They don’t care into which of those products it goes,” assuming the death benefit for annuities and mutual funds are equally profitable, says Kenneth Kehrer, president of Kenneth Kehrer Associates Inc., a Princeton, N.J.-based consulting firm.

SunAmerica and Skandia executives dismiss the cannibalization threat. They say annuity owners buy the product more for the tax advantages than for the death benefit.

Of course, those benefits could be wiped out if the administration gets Congress to pass its proposal to tax variable annuity policyholders who change contracts or subaccounts within an annuity plan.

“They are different animals,” says J. Steven Neamtz, executive vice president of SunAmerica Asset Management. “People invest in taxable mutual funds for differ
ent reasons than they do an annuity.”