Variable Annuity Updates Are Not Always an Upgrade
Recently, certain variable annuity customers of insurer The Hartford received correspondence from the company that they may hold an old contract which might benefit from replacement for a newer annuity product.
Angry financial advisors have pointed out that the company did not say specifically how customer specifically may benefit from exchanging their current product. Advisors are concerned that the newer products may in fact offer lesser benefits for a higher cost, and recent history shows they may be right.
With the market crash, many insurers found they had improperly priced their annuity products, placing their ability to pay the promised benefits at risk. As a result, product benefits were scaled back, and their costs increased. A vice president of marketing at an insurer recently wrote, "one response was to introduce 'simplified' products with fewer features and vanilla benefits. Companies are promoting these new simplified offerings as lower cost and more consumer-friendly; in reality, they often serve the interests of the provider and disproportionately reduce the value to the customer." When I come into contact with advisory firms that use annuities, I often find the advisors and representatives sell their expertise in offering 'new' products. In fact, just like The Hartford, these representatives do not always take the time to understand your current product past the realization there is another product which may offer a feature which provides the advisor with a reason to place a sale. They frequently recommend 'upgrading' to new annuities every several years. The catch is often that while the benefits of newer annuities may be less, they often sound more attractive to a prospective consumer who would not know better. Recent features that 'lock-in' market gains sounds attractive at first glance, however the income stream offered from a variable annuity product may be significantly less than traditional products or prior versions of the annuity. The 'benefit' of the new feature might mean significantly less income and higher fees not worth the cost to pursue.
Annuity owners need to independently compare all of the features and costs of their current product with any proposed change. It often is also in the financial advisors interests to sell a new product, since many products front-load commissions; when working with a new advisor, it almost always makes sense for the advisor to propose a sale since they aren't paid on your prior contract. However, when placing an annuity sale, the advisor is not only wearing the hat of your advisor, but they are also acting as a 'producer' for an insurance company.
For these reasons, don't count on an insurer or advisor to act only in your best interest when it comes to being sold an annuity product.