It's almost enough to make any investor and advisor dizzy. Every month, it seems, brings another announcement of a modification to an existing variable annuity (VA) contract. In fact, in the second quarter, Morningstar charted 182 changes, up from 97 in the first quarter and 168 in the same quarter of last year.
Morningstar characterizes most of the changes as "low impact," involving primarily fee hikes, benefit reductions and sub-account options of the lower-volatility variety.
Yet there have been some splashier revisions that have garnered headlines, such as buyback offers of guaranteed living benefit or death benefit riders and suspensions of deposits. Hartford, which has stated its intention to exit the VA business, has told owners who possess certain guarantees that they must move at least 40 percent of their money into bonds. If they remain in stock funds, they will forfeit the guarantees.
For policyholders and their advisors, these alterations can bring on confusion and questions. What do all these change mean to the contract? Is it worthwhile keeping it?
Meanwhile, the carriers counter that these revisions are an attempt to remake contracts written in more flush economic times more viable (and profitable) in today's sustained low interest rate environment.
Todd Solash, managing director, product development, for AXA Equitable, says the impetus for these changes is (no surprise) the low interest rate environment, which make pricing more difficult. But policyholder behavior, as evidenced by low lapse rates, is reshaping the variable annuity world as well. Policyholders are holding onto the contracts longer, which also impacts pricing.
Since last year, AXA has made two buyback proposals for some of its variable annuity contacts: one for cash in exchange for forfeiting the death benefit (DB) and more recently, a buyout of the living benefit rider.
"Simply put, you can't sell in 2013 what you sold in 2006," Solash says. "By the same token, it's still a very valuable benefit for consumers and we think there's a big market for it. It's just not the same product it was pre-crisis."
But all those changes place a burden on investors and their advisors. Should they take the buyout offer? Is a pared-down benefit contract better than not having one at all?
For advisors, the main challenge is reassessing the potentially restructured variable annuity contract and whether it still makes sense for a particular client, says Robert Pettman, senior vice president, investment and planning solutions, for LPL Financial. He works with advisors and says their concerns revolve around getting the information they need so they and their clients can make informed decisions.
"It does place a notice on the financial advisor and the client to come together and understand what exactly is being presented and make the right decision," Pettman says. Though he admits he may be over-generalizing, a buyback offer might work in an instance where the client's needs have changed since when they first purchased the contract. "In those situations, having choice is certainly a good thing," he says. "You need to make sure they don't currently have those needs that they would essentially be forfeiting by the offer."
John Olsen, president of Olsen Financial Group, says it's important to distinguish between those carriers that offer existing contract holders the choice of keeping their contracts as is or taking a lump sum "buyout" of the income benefit guarantees and those few that require contract owners to consent to the new pricing and benefit changes or lose the guarantees. The first group, he says, are simply being responsible in trying to reduce their risk exposure while treating existing customers fairly. The latter, he says, "should be ashamed of themselves. They sold a product that they underpriced, and are now trying to make buyers of that product pay for that mistake. It's a 'bait and switch.' "
In either case, Olsen says these contract changes require buyers of these contracts to revisit their original purpose in purchasing the annuities and to re-assess whether they make sense now, given the new costs and benefits. "Am I trying to accumulate or am I trying to guarantee an income that will never run out? Those are two different things that require different solutions," Olsen says.
Equipped to make a decision?
