The list of insurers offering annuity contract buyouts continues to grow, to increasing exasperation of annuity gatekeepers at broker-dealer firms.
The Hartford Financial Services Group Inc. was the latest among variable annuity sellers to announce that it would give a number of legacy customers a chance to trade in their contracts and get an increase in the account value.
In exchange, these customers will give up their guaranteed-minimum-withdrawal benefit, the Lifetime Income Builder II, which increased income benefit payments depending on the market performance of the contract.
Customers being made the offer account for 15% of Hartford's U.S. GMWB book in terms of account value, and close to 45% of the company's U.S. GMWB net amount at risk. About 55% of the contracts have a surrender charge, which will be waived for those who accept the deal.
“As we look at this book, a significant portion of it is in the money,” Beth Bombara, president of Hartford's life runoff business, said during a Nov. 2 earnings call. “There are several policyholders that, if they elect this benefit, they would receive an amount greater than their current account value.”
Hartford joins Axa Equitable Life Insurance Co., which offered some legacy VA clients the choice of dropping their death benefits, and Transamerica Life Insurance Co., which rolled out a lump-sum offer to select VA customers.
Advisers and broker-dealer executives understand that an extended period of low interest rates, combined with numerous underwater VA contracts and generous product features, are the motivation for insurers to shake off their legacy clients.
But they're displeased with the growing number of insurers that are making these offers and continue to question whether the deals are really the best for clients.
The immediate worry is suitability. Clients must weigh whether income for life carries more potential worth than a boost to account values.
The problem is that it could take years to ascertain whether it was indeed the best idea to go with the buyout. Accepting an enhanced lump sum over lifetime income might make sense if the client isn't expecting to live long.
“The key problem is that you don't know if it's better for the client or not until they die,” said Scott Stolz, president of Raymond James Insurance Group.
“Everything we do is subject to second-guessing,” he added. “We can have all the information, but that doesn't stop someone from coming back and saying: 'You should have known this.'”
Others have had problems with how the offers are being presented to clients. Bernie Gacona, director of annuities at Wells Fargo & Co., said letters going directly to clients from insurers have not pointed out the risks of the buyouts.
“It's not in the best interest for 98% of the clients. They highlight the advantages of these offers, but not the negatives,” Mr. Gacona said. “In many situations, carriers are asking people to cash out. There's a tax consequence to that.”
The lack of disclosure has been problematic enough that Mr. Gacona approached insurers last month with a suggestion that the letters encourage customers to call their brokers to help assess the terms of the deal and head off any conflicts.
“In a lot of situations, we think the client is getting this offer and sending the form back [to the insurer] without talking to the adviser,” he said. “A year later, when they realize what they've done, they'll come calling on us.”
Axa, which started sending client letters in early October, gave firms a heads-up in August and sent detailed letters to affected advisers in September, according to Discretion Winter, the company's spokeswoman. Customers have until Jan. 11 to respond.
“We have deployed considerable resources to inform and support advisers and clients in making the decision about the Accumulator death benefit limited-time offer,” she said.
Transamerica spokesman Blake Bostwick did not immediately return a call seeking comment.
The number of clients taking the buyout isn't especially high at Wells Fargo or Raymond James. At Wells Fargo, only 3.5% of clients offered an annuity buyout have accepted it. At Raymond James, 10% of Transamerica clients who could choose a buyout have taken it.
Among advisers, the biggest difficulty is combing through the offers and attempting to calculate whether a choice made today will still make sense years from now.
Thomas Fross, founder of Fross and Fross Wealth Management, has 26 clients who have been given the option of surrendering Axa VAs that carry a death benefit. None has taken the buyout. With the exception of one offer, “the numbers were horrendous,” he said.
In one case, a 70-year-old client with an account value of $331,000 and a death benefit of $547,000 was quoted a $79,000 increase to the annuity's account in exchange for terminating the death benefit feature. Though the increase in value would bump the account value to $410,000, the investor would miss out on 6% annual increases to the benefit base until 85. In 15 years, the death benefit's value could surpass $1 million, Mr. Fross said.
“Why do it unless the client has turned their back on the idea of a death benefit?” he asked. “I had to encourage them not to take the offer unless the goal has changed and death benefits are no longer important.”