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Annuity Caution #7: Variable Annuity Rider Buy Backs


Recently, annuity-owners of variable annuities with riders from insurance companies, such as AXA Equitable and The Hartford, have been contacted by their insurance company issuer. The offer is in writing, and sometimes followed up with a phone call, with offers to pay the annuity-owner a one-time lump sum to relinquish (void) some of the initial riders with guarantees, benefits that rely on the insurance company to pay them. Is the lump sum better or the long-term guarantee?


First, let’s take a step back and look at these variable annuities and what they offer. Annuity FYI has long suggested that investors consider variable annuities with lifetime income or guaranteed minimum income benefit riders. Any guarantees of annuities are based on the financial strength and claims-paying ability of the insurance companies who issue them. Variable annuities do not usually have guarantees built in, so must be purchased through riders. Lifetime income riders, for example, allow an investor to convert their variable annuity investment into regular monthly payments for as long as they live – regardless of their account balance. Such riders can provide greater financial confidence for retirees by providing at least a certain amount of income on a regular basis, regardless of market conditions.

Some VA Riders are So Good for the Investor that the Insurance Companies Want Them Back

The insurance companies that issue these annuities and riders must keep an ample amount of financial reserves on hand in order to meet these promises. In doing so, they must also hedge against potential market volatility – which is oftentimes difficult to estimate. Hedging is also necessary so that the insurer is covered in order to correctly deliver on the way in which an annuity contract holder decides to allocate their assets or exercise their rider options in the future.

Some insurance companies sold variable annuity riders in the past that they now feel are too “rich” for the investor and create an undue burden for the insurance company. In an effort to reduce some of the risk on their variable annuity businesses, some insurance companies are now offering to “buy back” some variable annuity riders – usually in the form of a one-time increase to their account value in exchange for voiding the particular rider.

To Buy Back or Not to Buy Back

This means that the holders of these particular annuity riders on their contracts can cancel certain features on the annuity in return for an increase in their overall annuity account value.

Some insurers, for example, have offered to boost a client’s account value if the client agrees to terminate the rider. Others have actually stopped taking contributions into certain annuity contracts altogether.

The rider buyback offers are being presented as a “win-win” for both the annuity holder and the insurer, as they reduce the insurance company’s risk of dipping into their general account assets to pay benefits, and at the same time, increase the overall annuity value for the client – in some cases, significantly. Investors should be cautious before agreeing to such terms. Imagine for example that you bought a car from someone, and a few months later they contacted you and asked to buy it back for more money than you paid. Would you quickly agree to that buy-back? For the same reasons, you need to consider your variable annuity rider(s) buy-back carefully.

These offers are voluntary and give contract holders the opportunity to keep their annuity – along with the associated riders – as is. In addition, clients may also be able to utilize a fifteen-day reinstatement window. The insurer is required to notify you that, if they terminate a variable annuity contract due to a failure to comply with certain investment or other restrictions, the annuity holder will have the right to reinstate the rider as is within fifteen business days of the rider’s termination.

Where to Go From Here

For those who are contemplating taking the buyback offer or continuing onward with all current annuity products and riders in-tact, there are some important factors that should be considered.

First, in all likelihood, the insurance companies that are offering the buybacks would not be attempting to purchase these products back unless they were valuable to the annuity contract owner. Therefore, it is essential to carefully consider moving forward – even though a lump sum of cash to increase the annuity’s value may seem appealing.

In any case, you may find it difficult to understand what you are being offered – and what you are giving up in return.

With this in mind, talking with a neutral party who has an expertise in variable annuities and riders may be a good course of action. The variable annuity professionals at AnnuityFYI can be contacted via email and at 1-866-223-2121 (tel:+18662232121) to discuss all of the options that are available to you. By contacting us, you may be offered variable or fixed insurance products and investments for sale.

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Document reference: #1500261-16

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