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

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