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Insurance Guarantees Investment Will Grow

April 05, 1998|RUSS WILES | Russ Wiles is a mutual fund columnist for The Times and co-author of "How Mutual Funds Work" (Simon & Schuster). He can be reached at russ.wiles@pni.com

What do you get when you cross a term life insurance policy with a mutual fund?

An investment that's guaranteed not to lose value for your heirs.

SunAmerica Asset Management, a subsidiary of the Century City-based financial services company, has introduced just such a product, designed to appeal to investors who know they need to put more money into the stock market but are gunshy about doing so. It might be described as a specialized form of a variable annuity that can be attached to any of SunAmerica's mutual funds but that has the advantage of being simpler, adding one major insurance feature.

For a modest cost, the company's new Asset Protection Plan includes a death benefit that, in effect, ensures that the value of your mutual fund investment will have grown by at least 4% annually by the time you die.

The insurance guarantee, which SunAmerica says is the first of its kind, is an option that can be purchased with any of the company's 19 mutual funds. It's available to new shareholders ranging from 21 through 74 years of age.

"The benefit goes on after your 75th birthday," said Steve Neamtz, executive vice president at Sun-America Asset Management.

It's too early to tell if SunAmerica has become a trend-setter for the fund and annuity industry with this plan, but the feature is an intriguing one.

Investors have 30 days from the time they buy into one or more of SunAmerica's mutual funds to elect the optional insurance coverage. Assuming you do so, you would pay a $25 fee to set it up and for the coverage be charged 0.2% each year for each $1,000 invested, paid quarterly.

SunAmerica will automatically redeem a few of your shares or fractional shares to pay for the insurance; if you have several fund holdings in an account, the company will liquidate those with the most stable share prices, such as a money market fund, to simplify your tax record-keeping.

The price guarantee covers the value of your entire SunAmerica account, not that of each individual fund.

As with any mutual fund, you can sell your SunAmerica holdings at any time, although the insurance protection obviously would expire at that point.

Unlike the way it is with many other forms of life insurance, you don't need a health checkup to obtain coverage.

Because the Asset Protection Plan is a group term life insurance arrangement, SunAmerica must receive approval from insurance commissioners in each state where it hopes to market the program. So far, about two-thirds of the states have given a thumbs up to the idea, including California, with Neamtz expressing confidence that permission eventually will be obtained everywhere.

The insurance guarantees that an investor's entire account--whether it's one SunAmerica fund or several--will grow by at least 4% annually, to a maximum 200% cumulatively over many years. As noted, the coverage comes into play only when an investor dies.

Is the insurance feature a good deal?

An ongoing charge of 0.2% a year comes to just $2 a year for each $1,000 a person has invested--not an exorbitant amount but enough to affect performance in the long term. On the other hand, such protection may be unneeded given that the stock and bond markets typically return well more than 4% annually anyway.

"On a stock fund, even the 4% growth rate should be irrelevant after a while, yet you will have to keep paying that 0.2% fee," said Preston Caves of Caves & Associates, a fee-only financial-planning firm in Manhattan Beach. He thinks investors can do better by choosing lower-cost funds and allocating them among various investment categories to ensure good long-run returns.

Caves notes that investors "would have to die to get any current value" from the insurance plan.

SunAmerica's Asset Protection Plan is similar to the death benefits that are built into variable annuities. These features also guarantee that an investor's account won't fall below a certain amount at death, typically rising or "stepping up" in value over the years.

But as a rule, these death benefits aren't the main reason to consider variable annuities, says Donald Reiser, president and chairman of Veritas, a Houston company that sells low-cost annuities. Rather, he cites tax-deferred growth, the ability to switch money among funds tax-free and the original purpose of an annuity: the ability to choose a lifetime payout option so you don't outlive your money.

Reiser, like Caves, thinks the death benefit on the SunAmerica funds will be of limited importance unless the financial markets slide into a prolonged slump. But he also thinks the 0.2% cost is reasonable for a guaranteed 4% yearly return. "It's a clever feature," he said.

Neamtz admits that the benefit might be primarily psychological, providing comfort for skittish investors lacking much experience with market fluctuations.

"It's designed to be a backstop," he said. "'We hope it will be a confidence-builder to help people make allocation decisions that include equities in their portfolios."

*

Russ Wiles is a mutual fund columnist for The Times and co-author of "How Mutual Funds Work" (Simon & Schuster). He can be reached at russ.wiles@pni.com

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