April 23, 2024

You are here: Home / Archives for lump sum

Wealth Matters: That Bland Annuity Notice May Be Anything but Routine

July 12, 2013 by Leave a Comment

That’s because several insurance companies that sold variable annuities with generous income or death benefits before the financial crisis are having sellers’ remorse. Meeting those obligations — often guaranteed returns or payouts of 6 or 7 percent — has become tougher with interest rates low and the costs to hedge these guarantees high.

Now these companies are trying to persuade annuity owners to take buyouts or, in one case, are insisting that clients move into investments with lower returns — with the penalty of losing their guaranteed payment if they do not. Many of these notices arrive as bland-looking letters with little indication that they may be urgent.

“It caught the distributors off guard that the carriers would make these kind of changes, particularly to existing clients,” said Bernie Gacona, director of annuities at Wells Fargo, a large distributor of annuities. “We don’t have issues when carriers are making changes to the products with new clients — they don’t have to buy it. With existing clients, you’re pretty stuck.”

AXA Financial, which made an offer to buy out death benefits last fall, has filed with the Securities and Exchange Commission to expand the program to include riders that guarantee the rate of accumulation in an annuity. AXA would pay the annuity holder a lump sum to give up the rider.

“There were a lot of benefits sold by us and others prefinancial crisis that have become much more expensive than anticipated,” said Todd Solash, managing director of product development at AXA. “It’s fully voluntary. We’ll put money in, in exchange for canceling the riders.”

The Hartford, which is getting out of the annuity business, has gone further: it has sent letters to clients and advisers saying that they have until October to change the asset allocation in certain variable annuities. The goal is to lower the client’s balance and therefore the amount the company will have to pay out. If they do not do this, they will lose the rider that guaranteed a payment regardless of the cash value of the annuity. Instead of getting a 5 percent guaranteed payout for life, the owner would get a lower payout based on a lower account value.

“It’s important to note that the investment changes are not applicable to all contract owners, but to those where the investment changes are permitted under the existing contracts,” said Shannon Lapierre, a spokeswoman for The Hartford.

The Hartford’s original letter to advisers in May, given to The New York Times, was vague about what was happening. It put changes to the investments people were allowed to make toward the end and made no mention of the severe penalties. Instead, it referred advisers to a Web site for more information.

A letter sent to clients in June highlighted that “the withdrawal feature of your optional benefit rider will be revoked” with the last three words in capital letters. Ms. Lapierre said additional letters would be sent from now till the Oct. 4 deadline.

While the changes these two companies are making are at different ends of a spectrum, they are part of a trend with variable annuities sold in better times. Last fall I wrote about Prudential Annuities’ canceling provisions in 14 annuities with guaranteed payouts that allowed owners to continue to add money to them. Earlier this year, AXA also eliminated two dozen investment options and moved clients’ money into different funds.

These changes are also emblematic of how complicated these types of annuities have become. Still, in a time of low returns and few guaranteed sources of income, there is often a desire for the perceived security of annuities, which come in many forms.

So, how should some people consider what they already own? How should others consider a sales pitch to buy a new annuity?

It’s worth noting that all of these changes are legal, and the company’s right to do what it is doing is detailed in contracts that stretch to hundreds of pages. That is part of the problem, of course, since people often do not read those contracts closely.

This article has been revised to reflect the following correction:

Correction: July 12, 2013

An earlier version of this column misidentified the developer of the annuity intelligence report. It was developed by Morningstar, not the Macro Consulting Group, which uses it to analyze annuity contracts.

Article source: http://www.nytimes.com/2013/07/13/your-money/annuities/that-bland-annuity-notice-may-be-anything-but-routine.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Bucks: Good News for Spouses of Reverse Mortgage Holders

April 8, 2011 by Leave a Comment

In the face of a lawsuit from the AARP Foundation, the Department of Housing and Urban Development has backed off an apparent policy change that was putting some widows and widowers on the brink of foreclosure.

The dust-up involves reverse mortgages, financial products that allow older Americans with a decent amount of home equity to tap some of that equity if they are at least 62 years old. Unlike a home equity loan, where you have to pay the money back, with a reverse mortgage the bank pays you, say in a lump sum or in monthly payments. Once you no longer live in the home, you or your executor (if you’re dead) sells it and pays the bank back.

The foundation and Mehri Skalet, a law firm, sued HUD in the wake of a policy letter in 2008 that seemed to state that widows or widowers who were not listed on a spouse’s reverse mortgage would have to repay the full amount of the deceased spouse’s mortgage. They’d have to do so even if the home was worth less than the outstanding loan.

Not long after, some surviving spouses found themselves unable to pay off the loans or get a new mortgage for the outstanding balance on the old reverse mortgage. As a result, they ended up in foreclosure proceedings. The foundation had sued on behalf of three of them.

In a letter it released this week, HUD rescinded the 2008 letter. And while this week’s letter didn’t say so specifically, Jean Constantine-Davis, a senior attorney for AARP Foundation Litigation, reports that the lenders will now halt foreclosure proceedings against its three plaintiffs for the time being. A HUD spokesman did not return a call seeking comment.

The lawsuit is not over, though. The foundation hopes that a judge will confirm that HUD cannot ever force a widow, widower or heir to pay a reverse mortgage lender more than a home is actually worth, whatever the balance may be on the mortgage.

It also wants to establish surviving spouses’ right to stay in the home if they so choose, even if they weren’t party to the original reverse mortgage. That might mean that the lender is on the hook for the reverse mortgage loan longer than it expected to be. But Ms. Constantine-Davis said she thought that as the guarantor, HUD ought to buy the loans from the lender if this became a problem for the lender.

If that becomes too burdensome, HUD might make new rules that could, say, require that both spouses always be listed on the mortgage, while making some kind of provision for people who get married after one of them has gotten the reverse mortgage loan and wants to add a spouse to the mortgage.

Meanwhile, Ms. Constantine-Davis notes that HUD does not currently require both spouses to undergo counseling when only one of them applies for a reverse mortgage. (One spouse may apply alone because the monthly payout from the lender is usually higher if just the older spouse applies.) Without explicit counseling, spouses who are not on the mortgage may not know that they could end up in a situation like those of the plaintiffs in this case.

One easy fix might be for HUD to make both spouses come for counseling no matter what. Another, as I mentioned in a column a few weeks ago, is much simpler and doesn’t require more regulation: Don’t ever take yourself off the loan, even if it does mean that the payout is lower.

Article source: http://feeds.nytimes.com/click.phdo?i=bb97f9c8db929e2d7492cda9cb19e109

Filed Under: Your Money Tagged With: , ,

Annuities: What You Need to Know

April 3, 2011 by Leave a Comment

Here are the basics of annuities.

TYPES In its most basic form, an annuity is a contract with an insurance company that makes payments at regular intervals for a set period of time. The classic fixed-annuity provided people a set payment for however long they lived — from a few months to decades. An insurance company’s actuaries took their best guess on your life expectancy while you hoped to outwit them and collect a check into your 90s.

Few annuities are structured this way anymore. One reason is people have realized that a static payout is not great. For one thing, it does not account for inflation: $1,000 a month today will probably not buy as much in 10 or 20 years.

To make annuities more appealing — and to bring in more money — insurance companies created more sophisticated types of variable annuities.

Many of these annuities offer the option of a higher payment if the value of the underlying securities rises yet lock in a minimum payment if they fall.

One popular annuity gives people a sense of flexibility by allowing them to withdraw some or, in certain cases, all the principal, if they need it. In living longer, people will require income for more time but they are also increasing their chances of contracting catastrophic illnesses, from cancer to Alzheimer’s, that carry huge medical costs. The guarantee of regular payments is comforting. But the need for a lump sum at a particular time can sometimes be more practical.

Other popular models are structured to continue after the original beneficiary’s death. A “joint-survivor” clause stipulates that if the husband dies first, the annuity continues to pay out to his wife through her lifetime, while another provision leaves some of the remaining principal to other heirs.

IMMEDIATE VERSUS DEFERRED These are two terms that are often used when discussing annuities. The difference is simple but often obscures the vast array of annuities being offered. With an immediate annuity, a person pays a lump sum and begins receiving income right away. That’s the immediate part. In the past, these were usually life-only annuities, meaning if you died a week later, that money was gone. Now, immediate annuities have all the variations mentioned above.

A deferred annuity has two phases — accumulation and distribution. Over a period of time, a person builds up the value of the annuity and then selects a time to start receiving payments from it. People who change jobs, for example, could opt to roll their Individual Retirement Accounts into an annuity and let the money grow there. Or they could make contributions to the annuity for a set period of time as they would with any savings plan. When they have accumulated enough to finance their goals, they can decide when they want to start receiving payments. They can start and stop the payments at will, though the idea is that they will wait until retirement.

ALLOCATION TO ANNUITIES Regardless of what type of annuity you select, the main question is how much of your portfolio should you put into one? The rule of thumb is to use annuities to cover your basic living expenses. Most providers recommend that you put no more than a third of your assets in annuities. Others limit retirees to 75 percent. Financial advisers not associated with insurance companies will generally argue for putting little in annuities: they feel they can get better returns through a diversified portfolio of securities. That’s a harder sell, though, after two rounds of huge losses in the stock market in one decade.

BENEFITS AND LIMITATIONS The benefit of putting a chunk of your nest egg into annuities is the guaranteed payment. Whether the economy is good or bad, an annuity pays a minimum amount of income every month. You may have to put a large part of your nest egg into the annuity to receive the amount you need to live on, but you know it will be there.

There are four main downsides to annuities. First, they are expensive. A fixed annuity typically pays out no more than 5 percent of the principal each year. That means you would have to put $100,000 into a fixed annuity to receive an annual payout of $5,000. Even the most frugal retirees would struggle to live on $400 a month. To receive, say, $2,000 a month, they would have to invest $500,000.

The other cost is the fees associated with the annuities. One rule of thumb is the more guaranteed features attached to an annuity — from inflation adjustment to joint survivor — the higher the cost. These costs, as with mutual funds, are embedded in the annuity itself. They do not come in an upfront fee but are hidden in the payouts.

A third problem is expectations. People who bought annuities with payments that grew as the underlying securities grew could be in trouble. Those payouts are not going up when the stock market loses 40 percent of its value in one year. Likewise, when government policy makers are more worried about deflation than inflation, payments that adjust for the cost of living are going to remain at the guaranteed minimum.

Lastly, the government taxes distributions from annuities as ordinary income, with rates that run up to 35 percent. Money put into a brokerage account is taxed at the capital gains rate, currently 15 percent. Under the current tax regime, if someone receives a payout greater than $32,500 a year, that would be taxed at a 25 percent income tax rate — higher than if that same amount had been paid out through a brokerage account.

The popularity of annuities waxes and wanes with the economic cycle. They had a resurgence in the years after the technology bubble burst in 2001 and 2002. The recession of 2008 could do the same, though insurance companies may be constrained: in response to previous demand, they underwrote so many annuities that credit rating agencies are questioning their risk management skills.

Like any part of a portfolio, annuities are best taken in moderation. They are a great way to guarantee a certain amount of fixed income in retirement. But if overdone, they could rob a portfolio of needed flexibility.

For more on annuities, the Securities and Exchange Commission offers some basic information on one part of its Web site and more specific guidance on variable annuities as well. The Insurance Information Institute’s annuity guidance is also useful. The Hartford, one of the leading sellers of annuities, offers a fair bit of good information here, and MetLife, another leading purveyor, presents its own guide to deferred and immediate annuities as well.

Article source: http://www.nytimes.com/2009/01/28/your-money/annuities/primerannuities.html?partner=rss&emc=rss

Filed Under: Your Money Tagged With: , ,