|By PAUL SULLIVAN|
For owners of variable annuities, reading letters that may look like routine notices from an insurance company might be the difference between receiving the payment they expect and one that is significantly lower.
That’s because several insurance companies that sold variable annuities with generous income or death benefits before the financial crisis are having sellers’ remorse. Meeting those obligations — often guaranteed returns or payouts of 6 or 7 percent — has become tougher with interest rates low and the costs to hedge these guarantees high.
Now these companies are trying to persuade annuity owners to take buyouts or, in one case, are insisting that clients move into investments with lower returns – with the penalty of losing their guaranteed payment if they do not. Many of these notices arrive as bland-looking letters with little indication that they may be urgent.
“It caught the distributors off guard that the carriers would make these kind of changes, particularly to existing clients,” said
“There were a lot of benefits sold by us and others pre-financial crisis that have become much more expensive than anticipated,” said
“It’s important to note that the investment changes are not applicable to all contract owners, but to those where the investment changes are permitted under the existing contracts,” said
The Hartford’s original letter to advisers in May, given to The New York Times, was vague about what was happening. It put changes to the investments people were allowed to make toward the end and made no mention of the severe penalties. Instead, it referred advisers to a Web site for more information.
A letter sent to clients in June highlighted that “the withdrawal feature of your optional benefit rider will be revoked” with the last three words in capital letters. Ms. Lapierre said additional letters would be sent from now till the
While the changes these two companies are making are at different ends of a spectrum, they are part of a trend with variable annuities sold in better times. Last fall I wrote about Prudential Annuities’ canceling provisions in 14 annuities with guaranteed payouts that allowed owners to continue to add money to them. Earlier this year, AXA also eliminated two-dozen investment options and moved clients’ money into different funds.
These changes are also emblematic of how complicated these types of annuities have become. Still, in a time of low returns and few guaranteed sources of income, there is often a desire for the perceived security of annuities, which come in many forms.
So, how should some people consider what they already own? How should others consider a sales pitch to buy a new annuity?
It’s worth noting that all of these changes are legal, and the company’s right to do what they are doing is detailed in contracts that stretch to hundreds of pages. That is part of the problem, of course, since people often do not read those contracts closely.
“Many people who own variable annuities don’t understand what they have,” said
His firm has developed what it calls the “annuity intelligence report” to distill lengthy annuity contracts into a few pages with bullet points for crucial information, like fees, withdrawal penalties and riders.
“When we’ve done these reviews, one of the most common mistakes is that the ownership or beneficiary is wrong,” he said. “Something so simple would preclude the guarantee from being continued” after the owner’s death. (Changing it requires a simple form.)
But there are also cases where years after buying an annuity, the owner wants it clarified. “We have done half a dozen reviews for financial advisers of their personal contracts because they didn’t understand them,”
In short, consumers have no real choice: either they switch to a less aggressive asset allocation or they lose a benefit they have been paying for.
A different risk is when annuity owners do not understand a buyout offer. According to an S.E.C. filing, AXA is offering to more or less split the difference for a 68-year-old man between the cash value of the annuity and the benefit base, which is the amount on which annuity payments would be based. (A woman, 63, would get a third less than the man to give up the same rider since statistically, women live longer.)
Most advisers consider this a bad deal. “The client gets a short-term bump up but loses any guarantee of income for life,”
He said that the only people who should consider the buyout are those who do not need the income or have had an illness or other financial event where they need the money now.
Even if a carrier makes no changes to the riders, provisions in many contracts can be detrimental to a person’s financial plan if the provisions are not understood.
For one, carriers address how excess withdrawals will affect an annuity’s guaranteed value differently. Some reduce it dollar for dollar. More commonly, the excess withdrawals reduce the value on a pro-rata basis: if the withdrawal is 10 percent of the cash value, the guaranteed value also falls by 10 percent. Neither affects the annual withdrawal too drastically.
“Insurance companies have been pretty good with saying the extra withdrawal is going to affect the guarantee,” he said. “But if someone says ‘I don’t care, send me the money,’ they do, and that person doesn’t know that that withdrawal is going to affect them by
All is not entirely dismal when it comes to annuities. Insurance companies are bound by their contracts with customers. And
And variable annuities are not the only annuities out there.
Today, as a registered investment adviser, he said he advised clients to consider buying fixed annuities over time to accomplish the same goal of guaranteeing income in retirement.
“Our analytics suggest these are very attractive vehicles versus variable annuities with living benefit guarantees,” he said. “They’re very transparent and very low cost, and the math works.”
“One of the fundamental problems is that most of these variable annuity products are sold based on marketing materials and marketing hype, and there is no standard way to compare them,” he added. “It really never happened that these products were turned inside out to show the customers the upsides and downsides of them.”
That is where the burden falls to buyers and their advisers to understand what they own and whether it is as good as it seems.
|Copyright:||Copyright 2013 The New York Times Company|
|Source:||New York Times Digital|