Although The Hartford has been backpedaling on some of the changes they want to make to clients’ variable annuities, they are one of the first in a long line of companies changing up the way they offer variable annuity products. William W. Byrnes and Robert Bloink wrote “Are variable annuity guaranteed benefits on their way out?” for Life Health Pro detailing how the contracts are changing. Lifetime income guarantees brought many clients to purchase variable annuities in the first place, so changes to these offerings will definitely affect the overall industry. The benefits are at risk because insurance companies were just unable to predict what would happen with the contracts and what clients would choose when options were available. If you rely on these guarantees in retirement, make sure that you are aware of any impending changes from your insurance company.
2009 was a big year for variable annuities with lifetime income guarantees because the financial crisis was decimating many people’s retirement plans. Variable annuities were able to offer equity-like returns without the risk of stocks and other investments. Those who purchase variable annuities choose a specific investment option and can opt for lifetime income benefits with their product. Even with an increase in equity markets, the benefits of tax-deferral, investment components, and the safety of guaranteed income have kept variable annuities popular. But insurance companies didn’t think that so many people would hold onto their variable annuities when markets improved. This underestimation has put many insurers in a bad spot with the guaranteed income benefits that they are due to pay out. Insurers will have to keep reserves to pay out what is due on these contracts, totaling billions of dollars in contract value.
Earlier this month I blogged about The Hartford forcing changes to the investments in their outstanding variable annuity contracts. Clients have received notices that they will actually lose their guaranteed benefits if they don’t make a change to maintain at least 40% of their funds in bonds. The problem I see is that many people don’t even read the paperwork that they receive from their insurer. Hopefully the hype of the news story and a good advisor will ensure that everyone necessary sees the paperwork and makes the changes. We also saw a lot of insurance companies start offering variable annuity buybacks beginning last year. They are hoping to buy back the guaranteed income portion of their variable annuities in exchange for an increase in the clients’ account value. This may not be in your best interest, as it is in the best interest of the insurance company, so make sure that you know this change works for you before accepting it.
Moody’s released a report predicting many more insurance company changes to come. Whether they are making changes to investment options or hoping to buy back your lifetime income guarantees, it is likely that you will see proposed changes if you have a variable annuity contract. If you do, read any incoming paperwork carefully and get an expert opinion before you agree to changes or attempt to make them on your own.
Written by Rachel Summit
