Review Your Variable Annuity Guarantees

For more than a decade investors have been attracted to an array of enhanced death benefit and withdrawal guarantees in variable annuities. Volatile markets, economic turmoil, historic low interest rates, and demographic trends made income security a dominant concern. Insurance companies appeared to have found a big market for what they do best – insuring stuff. But pricing the risks turned out to be kind of tricky.

The financial crisis and market sell-off of 2008-09 greatly expanded the obligations inherent in those guarantees while shrinking the variable annuity account values from which an insurer could draw the contract fees designed to compensate for that risk. Investors had cut a good deal for themselves by securing those guarantees in the years leading up to the financial crisis. Some carriers exited the variable annuity business and started looking at ways to rein in their liabilities.

After all, a variable annuity is a contract between the insurer and the owner (investor). Both parties can make changes, including the investor’s option to walk away, usually subject to surrender charges for at least a few years). Some insurers are exercising contract prerogatives such as restricting the investment choices allowed in conjunction with a guarantee. Others have offered to add money to contract holders’ accounts in exchange for canceling a guarantee feature.

A diverse array of guarantee benefits is still available to variable annuity buyers, generally at somewhat higher charges than were typical several years ago. If you already own a VA with guarantees in place, it is important to review the contract with your advisor from time to time. Basic elements of such a review include the following:

Is the guarantee currently in or out of the money? This may or may not be easy to determine, but it’s basically a question of whether one could comfortably secure a comparable benefit in today’s marketplace with the net (after-tax) proceeds from liquidating the contract.

Is the guarantee still relevant? Changes in one’s health, income, or estate planning may change the objectives that drove the selection of a given guarantee several years ago.

Is the investment allocation still appropriate? In combination with the considerations above, there may be strategic reasons to be more or less aggressive with the investment choices inside the contract.

We can help you evaluate these issues in the context of your total investment holdings and objectives. And please note: Any guarantees associated with variable annuities with living benefits are always dependent on the credit-worthiness or claims paying ability of the insurer.