Annuity guarantees revoked

[braumeister]

Apologies if this has already been posted, but I just saw it and thought about those who occasionally ask for concrete reasons why variable annuities have such a poor reputation here. This shows a good example of the kind of potential problem that can be buried in the pages of fine print.

New Pressure on Annuity Holders

Hartford's new move may be the first that could result in owners inadvertently losing their long-held guarantees. The company is exercising what it says is a contractual right to impose new investing restrictions in order for owners to maintain guarantees, according to a letter dispatched last month by Hartford to annuity holders. It is requiring at least 40% of clients' money to be in fixed-income funds. If clients don't allocate their holdings accordingly by Oct. 4, the guarantee "WILL BE REVOKED," the letter declared in bold type.

 

[pb4uski]

IIRC many carriers had implemented such a restriction on new contracts back a few years ago. I suspect that in many cases the pricing for the guarantees probably assumed a mix of bonds and stocks.

So while I don't see the new restriction as unreasonable assuming they have the contractual right to impose it, I concede that the revocation of the guarantee seems a bit harsh - they could have just repriced the guarantee for accounts with less than 40% bonds.

 

[brewer12345]

Always read the fine print.

 

[growing_older]

I do read the fine print in contracts, and virtually all of them include horrible provisions that the drafting lawyers insert to protect the business at my expense. When I've tried to point that out, the response has always been "that's our contract we are not authorized to make any change" so if I want a particular product or service, I am going to have to sign something onerous with some provider.

 

[mickeyd]

Sometime folks forget that insurance companies issue unilateral contracts that the policy owner and company are obligated to abide by. Basic contract law; Read it and weep.

 

[clifp]

I do read the fine print in contracts, and virtually all of them include horrible provisions that the drafting lawyers insert to protect the business at my expense. When I've tried to point that out, the response has always been "that's our contract we are not authorized to make any change" so if I want a particular product or service, I am going to have to sign something onerous with some provider.

I know the system is really one sided. I can sort of understand for something like the license agreement on software product or credit card, the amount of money you spend on those products is measure in the hundreds of dollars.

But for an annuity the amount is often in the hundreds of thousands and the fixed nature of the contracts and the fact they seem to be pretty standardize is really unfair. You know if interest rates went up they consumers won't have had the option to say. Hey if you don't raise my interest rate I'm going to take my money back with a minimal penalty.

 

[heirloom]

Why is it just variable annuities?

Why do they care what you invest in? If you are invested in funds, the funds are paying you your gains...right?

 

[Independent]

Why is it just variable annuities?

Why do they care what you invest in? If you are invested in funds, the funds are paying you your gains...right?

It's the side guarantee. They are probably guaranteeing that you can withdraw 5% of your original premium every year for life. If your investments do badly, your balance will eventually hit zero. After that it's no longer "withdrawals" from your funds, it's just payments from the insurer.

 

[pb4uski]

Why is it just variable annuities?

Why do they care what you invest in? If you are invested in funds, the funds are paying you your gains...right?

Because the likelihood and magnitude of benefit payments under the minimum withdrawal benefit guaranty is a lot higher under 100% equities compared to 60% equities/40% fixed income.

IIRC where they got screwed is that they were expecting policyholders to hold a mix of equity and fixed income subaccount funds and priced the guarantees assuming that and then some smart agents pitched to their clients that the could invest aggressively and get a free lunch - if the aggressive investments did well then the clients came out ahead or if they tanked then the insurer would be on the hook under the guarantee.

 

[Brooks Saddle]

Why is it just variable annuities?

Why do they care what you invest in? If you are invested in funds, the funds are paying you your gains...right?

I'm not sure I understand what you are posting but I think I do. I would think that the insurance companies are concerned with the low interest rate environment and perhaps current valuation of the US stock market? Perhaps there is a chance that there are no gains for awhile but only losses.

I looked hard at purchasing a variable annuity through Vanguard. The more I researched variable annuities the more I read that the underlying costs of variable annuities was such a drag that even good performance of the underlying investments could not overcome the costs. As I recall Dr Pfau addressed this along with some others. The insurors do take the costs to start the annuity out up front so if you put $100,000 in, the $100,000 less expenses might be something like $96,000 or less working for you the first year. Then each year the insurors continue to take expenses out.

At first I liked the concept, especially at Vanguard but the more I read the less I became interested.

 

[heirloom]

OK...I understand it now. Thanks everyone for taking your time to explain.

 

[Chuckanut]

The more I researched variable annuities the more I read that the underlying costs of variable annuities was such a drag that even good performance of the underlying investments could not overcome the costs. As I recall Dr Pfau addressed this along with some others.

Yes. In his annuities/stocks portfolio research, SPIA'S did better than variables even over a long period of time because of the drag created by the high cost of the variable annuities.

 

[munnyman]

You might find this thread of interest:

http://www.early-retirement.org/forums/f28/deferred-annuities-rates-increasing-67613-2.html

Rather than duplicating them here, see my posts 31, 32, 33

Scary stuff. Be careful.

The best advice I ever got about retirement planning was that a maximum of your estate could go into annuities, which would be like a defined benefit pension plan companies used to have for employees. If a joint annuity, it would continue for the life span of both spouses. If there was a guarantee 25 year payout and both passed before that time, the balance would go to your heirs. Basically, because the insurance company takes 3.5% off the top every year, your payout goes down with every change you make ... the life annuity, which dies with you, will pay the most but you gotta live a long time to break even.

The balance should be split equally between 'dividend achiever' equities (like JNJ, KO, etc. that have a multi year record of increasing dividends) and good corporate bonds with a guaranteed return.

Bonds scare me right now as interest rates are so very low, but perhaps laddered less than 5 year bonds would work until interest rates go up...at least you retain your capital to maturity and the ladder means one matures each year which you reinvest into a new bond at (hopefully) higher interest rates.

 

[HappyOutsourced]

Is 40% not covered by the percent rollup then?

I was wondering if forcing 40% of the cash to be in fixed income funds means that 40% is not covered by the guaranteed 5 or 6% yearly rollup.

I have a small variable annuity that is supposed to be at 6% but it is really at about 5.5%. I was told this is because the small amount of money kept in the cash account to pay fees, etc. accumulates at only 3% (may be less than that now.) Wow, it would be terrible if an insurance company could force you to lose 40% of the guarantee you're paying for. And what's to prevent them from making that 100%?

 

[nun]

Wow makes my TIAA-CREF variable annuities (held entirely in CREF Global Equities and CREF Equity Index) seem positively lax.