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JULY 26, 2013

Will the New Look of Variable Annuities Benefit Clients or Insurers More?

Given the market volatility of the past several years, a number of insurance companies have recently made some fairly extensive changes to their variable annuity products. Some insurers have left the annuity marketplace altogether1.

A historically low interest rate environment, coupled with the high cost of hedging, has variable annuity issuers scrambling to find ways to either continue making their variable annuity (VA) business profitable, or leave it all behind.

As with other consumer products, insurers’ first reaction to the threat of low profits has been to raise prices. Many annuity contracts have clauses permitting changes to contract fees within a range, and recently fees have been on the way up2. In an industry that is already has a reputation for high customer charges, this may not turn out to be a successful long-term solution.  Other companies are offering buyouts3 of benefits that are too far “in the money”. While still others have opted to change the investment requirements in order to limit stock exposure4.


Is Anybody Out There?

As these major changes make their way through the VA market, there also seems to be a striking number of large insurers running for variable annuity exits. In just the past few years, some big names such as John Hancock, Hartford Life, ING, Genworth, and Sun Life have all reduced or eliminated their variable annuity business5. And, while this may surprise some, these moves have actually been justified as a way for these insurers to cut their losses, and stop throwing good money after bad.


How Advisors Are Rolling with the VA Changes

There may be fewer players in the variable annuity market which translates to fewer features and benefits to compare between companies, but it may still prove difficult for financial advisors to keep up with the numerous changes taking place in the VA marketplace.

Equally challenging for advisors is finding the right variable annuity related solutions that can best fit clients' needs. Today, with cuts in benefits, coupled with higher VA fees, many potential annuity clients feel that they are getting less for more—they probably are.

Despite all these tools insurers have to change the annuity equation in their favor, some have taken the extra step of disallowing contributions and additions6 to existing contracts. This may include refusing to accept 1035 exchanges. Here, too, the culprits include several big name insurers including MetLife, AXA, and Prudential.


The Bottom Line

For advisors and annuity holders alike, these changes in the VA marketplace may be a tough pill to swallow. Especially in light of the fact that thousands of baby boomers reach retirement every day, seeking long term income sources as well as growth for their retirement funds.

The changes taking place aren't just affecting potential annuity buyers, but also current annuity contract owners. Those who are already "locked in" to variable annuity contracts, for example, may find that the issuing insurer on their VA contract will be coming to them with a buyout offer where the annuity holder is given the option to exchange a living benefit for an increased VA account value.

While we don’t generally think variable annuities are the right solution for most investors, in hindsight, these clients probably bought some of the most valuable annuity contract terms, only to have the rules changed after the fact.  Sounds a little bit too much like “tails I win, heads you lose” from the insurance companies.

In any case, it is imperative that both potential and current variable annuity holders weigh their options carefully when deciding to buy or keep a variable annuity contract, especially as other income producing strategies may be more beneficial and consistent in the achieving your financial goals.

(Looking for advice on your specific contract? Contact Us about our free annuity evaluation for qualified investors).







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