Important Changes in Variable Annuities

Wall Street Journal reporters Leslie Scism and Liam Pleven recently highlighted the modifications made by insurers to variable annuity benefits. These annuities have been very popular with baby boomers looking for a safer retirement plan with tax benefits and a minimum return. However, the current slump in the economy has made many insurers unable to meet investment guarantees. It has increased the cost of hedging to fight the downside of these annuities; in the year it ending October 31, the cost of hedging has been said to increase by 80%, making the sale of the riskiest variable annuities less financially viable.

Scism and Pleven report on the trend of insurers either increasing the prices of their annuities or decreasing their benefits. For example, AXA Equitable Life Insurance Company recently discontinued their 6.5% guaranteed minimum income benefit plan, and increased the fee of their 6% annuity by 0.15%. Insurance companies may phase out selling their most costly annuities, and industry analysts also predict the advent of new products that will allow insurers to raise fees in the future. There is also the possibility that insurers may end up consolidating.

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