I am not sure how I missed this news earlier this month, but three of the biggest sellers of variable annuity contracts over the last 10 years have all begun to offer to their variable annuity clients the option to buy out the guaranteed life time income riders that were a core part of the reason many clients bought those annuities.
This decision is a result of the land mark accounting and financial changes imposed on these companies post 2008 and TARP. With out going into excruciating detail, life insurance companies that underwrite and sell variable annuity contracts are now generally required to mark their annuity portfolio to market each year. The impact being if there is a year where the underlying value of the variable funds declines 20% for example, then the life company has to pour money into their reserve to insure there is always enough money to cover the guaranteed payments offered as part of the riders that are a key element in these contracts.
Again, I am grossly simplifying this, but at the end of the day this market risk is a huge cost of business for Hartford, AXA and other firms and is largely the reason Hartford Financial Group can not find a buyer for this block of business. The risk is too huge and the benefits are too rich.
Consequently they are now actually sending offers to policyholders to agreed to surrender their guarantees in return for cash payments into their contracts. This is almost unprecedented and illustrates why the variable annuity business is for all intents and purposes dead in the water and will not be resurrected any time soon.
It also drives home the extreme pressure life insurance markets are under to get out from under these once profit rich, but now profit draining, deals and arrangements. The life insurance industry is pragmatically and systematically shifting away from expensive markets and products and consumers need to carefully consider their options if offered these buy outs.
Remember, those guarantees and life time payments have substantial and real value and they are on the hook for them. You bought them, you paid for them in your annual or initial charges and you are entitled to expect the life markets to honor them. The value of lifetime annuity income is going to become more and more obvious with each passing year so make sure you speak with a qualified financial or annuity adviser before making any permanent decision.