Beware the Fine Print in Your Variable Annuity
I wrote a blog last month explaining why it’s so difficult to get good advice on annuities, especially the more complex ones like variable annuities. We’re now starting to see the risks associated with failing to read all the fine print in that fifty page annuity contract. AXA Equitable Life Insurance Co. notified clients last month that it will drop 26 investment options from its Accumulator variable annuity contract, forcing annuity holders to shift dollars to less risky fund choices. Even more dramatic are the changes in store at Hartford Life. In a Securities and Exchange Commission filing at the end of April, Hartford is changing its prospectus to place investment restrictions on existing account balances for a number of contracts. Customers that fail to reconfigure their investments to meet the requirements will lose the guaranteed minimum income benefit which, for many, was the reason they purchased the annuity in the first place. What’s going on?
The difficulty the insurance industry is facing with variable annuities in today’s environment is a combination of their long-term liabilities coupled with their sensitivity to low interest rates and high market volatility. Take Hartford. In order to reduce the size and volatility of their annuity liabilities they decided to exit the variable annuity business. But even when a company stops selling new annuities, they are bound by contract to support the ones they’ve previously sold over the full lifetimes of their clients. So Hartford offered to buy-out a large number of existing contracts to further reduce their risk. Evidently it wasn’t enough. So what they and other companies are now doing is leaving themselves options in the contract provisions to change the terms after the sale, which limits the risk to the provider but may reduce the guarantees or returns expected by the investor after the fact.
The types of annuities that are most impacted are those with what are called Guaranteed Minimum Income Benefit (GMIB) or Guaranteed Lifetime Withdrawal Benefit (GLWB) riders. These riders guarantee the client will receive a certain amount of income regardless of the performance of the investments in which the client has allocated the premiums. As markets have churned over the last several years, many providers have discovered that they cannot profitably support such guarantees. So they have taken action designed to encourage clients to lapse what are otherwise very favorable guarantees on their behalf. And if these companies are no longer in the business of offering variable annuities anyway, they may be less concerned about making such unpopular decisions.
Ultimately it’s up to the buyer of an annuity contract to read the fine print, determine whether or not future changes are possible to the guarantees, and consequently assess the risk. Holders of existing contracts should especially be careful to take the required actions to avoid losing their guarantees. In many cases they will benefit by not only keeping the annuity but aggressively taking advantage of whatever income guarantees remain.