Variable Annuities Seek to Bail on Guarantees
Many variable annuity owners with Axa Equitable and Transamerica are receiving a letter they probably had to read over half a dozen times in order to believe it. The companies sent offers to policyholders to remove the guarantees (typically these are the only reasons one would buy a product with the high costs of a variable annuity), in exchange for a lump-sum added to their account values.
And while that may be surprising to some, I am more surprised by the feedback I’m reading from advisors who recommended these products. Every one seems to suggest an adversarial approach to the offer – the insurer is trying to pull one over on you, don’t let them!
Given I don’t operate from a world view that suggests successful insurance companies work within a ‘win-lose’ mindset with their policyholders (and as a non-insurance licensed financial advisor I certainly don’t understand selling an insurer’s products who I did think operated in that way), I recommend viewing the insurer here in a different way. Maybe an insurer looking out for their interests is part of the deal, but that can’t be the only reason an insurer would be driven to send such an offer.
Rather than continuing to look at annuities like some sort of great financial deal you pulled over on an insurer (this ‘deal’ aspect was after all the reason many bought the annuity), I suggest policyholders look at them in a different way – like you would a marriage.
Now, here I suggest it helps to look at it like a relationship with someone you knew had some flaws, who was maybe a little more unpredictable, flighty, than you traditionally would partner with, but also offered a little more excitement. You knew going into this relationship that this annuity offered something that they may have been stretching to fulfill. Despite their flaws, you signed up for a life partner.
And, if you were honest with yourself, the flaws were part of the attraction. No one is interested in your grandfathers safe and stable retirement income strategies or annuities – the ones where you had to give up your money in return for a guarantee you understood. No, we need more excitement than that in our lives after the dot-coms and great recessions… and so annuities changed their looks, tried harder and harder to impress you, and you bought their line, even knowing below the surface this may not have been the most honest relationship.
I recently reviewed a contract with these riders. Though the owner held it for nearly 8 years, during a period of stock market growth (and, yes, decline, but the decline is what you are supposedly protecting against) the account value had barely increased due to the high costs of these guarantees. The guaranteed income value was up, which to some would keep them handcuffed to the contract, but the amount of income produced could be replicated by taking all of the money out of the contract, investing it extremely conservatively for five years, and then receiving a much more stable income from a truly guaranteed strategy.
Instead, variable annuity benefit holders signed up for a partner that doesn’t realize these promises they’re struggling to keep are the only reasons you wanted them in the first place. Is this still sounding like a great relationship to have ‘till death or insurer insolvency do you part?
I think it’s important as well to keep in mind many of these firms received bailouts or recapitalized during the last downturn; the exact time you counted on them for support, many scrambled to find it themselves. Makes me wonder what I’d do if my significant other was getting a bailout from some other financial advisor…
My advice? Take some responsibility for your part in the relationship. Get an objective second opinion on your retirement income strategy from an advisor who is independent from the insurance world. View this as an opportunity to reassess if this company and product truthfully meets your goals.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/