The VA benefit exchange deals that insurers are positioning as a win-win for legacy policyholders actually could be a lose-lose, according to financial advisers.
Axa Equitable Life Insurance Co. and Transamerica Life Insurance Co. — in moves that will help reduce their liabilities — are unveiling programs that will permit clients to drop living and death benefit guarantees in exchange for increases in their account values. Experts predict that other insurers with legacy variable annuity business will follow suit.
But advisers and broker-dealers still have plenty of questions about the practicality of the offers.
“From the insurance company's point of view, they are offering a client an additional option, but it creates some interesting suitability issues for the broker-dealer,” said Scott Stolz, president of Raymond James Insurance Group.
An immediate need for cash might be the only situation in which a deal to give up the benefit in exchange for a higher account value would make sense for policyholders, he said.
In the case of Axa, how much the policyholder gets is based on an actuarial calculation that weighs the client's life expectancy, the contract's current and projected account value, the current and projected death benefit, and its enhancement. The offer is also based on the reserves backing the contract, so asset allocation in the variable annuity and interest rates are factors in the calculation.
Axa outlined its plans for holders of its Accumulator variable annuity in a June 8 filing with the Securities and Exchange Commission. The offer to allow holders to swap their guaranteed-minimum death benefit or their death benefit enhancement for a boost to their contract value will apply to those who bought their contracts between 2002 and 2007.
Last month, Transamerica made an offer to its legacy VA clients to swap their income benefits for a lump sum equal to 80% of their benefit base, to be added to their present account value.
Dave Paulsen, chief executive of Transamerica Capital Inc., said that based on initial activity in recent weeks, the company expects 15% to 20% of the eligible customers to take the deal, but he noted that the insurer doesn't have an end goal.
Advisers predicted that few of their clients will take the deals.
The fact that insurers are willing to offer the arrangement only emphasizes the true value of a living benefit, said Andrew Murdoch, an adviser with Somerset Wealth Strategies Inc., which is affiliated with Raymond James Financial Services Inc.
“It's like being offered a pension plan buyout,” he said. “Most of the time, people take the money and run, when actually the buyout is a better deal for the company.”
“This offer is completely optional for our customers and we don't require anybody to use it,” Mr. Paulsen said. “For those who will benefit by accepting the offer, there is some benefit for Transamerica, as well, as some older capital-intensive assets would be removed from our books.”
Taking the exchange may create tax implications for investors, according to Transamerica's filing.
If a client takes the deal and then surrenders the policy — which they can do without surrender charges — the transaction could be taxable, the insurer warned.
Above all, advisers said, given today's investment climate, an ex-change could create reinvestment risk.
“If you take 80% of the [guaranteed-minimum-income benefit in the Transamerica deal], you'll have this lump sum, but where will you put it to get that income?” asked Kevin VanDyke, founder of Bloomfield Hills Financial.
“How do you re-create a 6% income stream? You can't,” Mr. VanDyke said.
One alternative might be to transfer the larger account value to another existing contract if its provisions are even more attractive than the original annuity, advisers said.
They also said that the math behind the deals isn't very clear.
In Axa's case, a website offering more information about the deal isn't yet live.
“A lot depends on the calculation and what it looks like,” said Stephen Esposito, an adviser at Macro Consulting Group LLC. “The difference between getting a $110,000 bump to the account, versus a $130,000 bump, is a big one.”
Experts noted that the more complicated the calculation is, the less likely customers and advisers are to take the deal.
“If it's something that varies with a million factors, it might dampen enthusiasm,” said Timothy Paris, vice president at Ruark Insurance Advisors Inc., an actuarial consulting firm.
Regardless of how clients proceed, the deals present advisers an opportunity to review the contract with the clients and remind them exactly why they bought the annuity in the first place.
“The question is, "Have your goals changed, and do you really understand what you own?'” Mr. Murdoch said. “When owning a variable annuity, especially one bought years ago, a client might forget how it works and the insurer will get off the hook.”