Are VA settlements a good deal?

Feb 3, 2013 @ 12:01 am

By Darla Mercado

More financial advisers can expect to find themselves and their clients weighing offers to buy out the variable annuities they purchased years ago.

The buyouts, which boost a VA holder's account balance in exchange for dropping a lifetime income or death benefit rider, are giving carriers a new way out from under the hefty liabilities tied to the VA business.

Today's low interest rates have made it costly for insurers to hedge against VA features that were once so attractive, particularly to clients who experienced large account losses during the downturn but are holding valuable living and death benefits.

The Hartford Financial Services Group Inc. is the latest insurer to join the ranks of companies offering to give clients a raise in account value in exchange for losing the right to lifetime income from the annuity, filing a detailed document explaining its proposal with the Securities and Exchange Commission on Dec. 28. Transamerica Life Insurance Co. and Axa Equitable Life Insurance Co. also offered clients a bump-up in account value in exchange for their agreement to walk away from guaranteed benefits.


Broker-dealer executives and advisers say few clients are taking the offers, but they expect more and more people will have to face the choice of whether to leave their contract as is, or take the enhanced account value in exchange for the guaranteed benefits.

“The answers aren't black and white,” said Mark Cortazzo, senior partner with Macro Consulting Group LLC. “A lot of it is driven by the client's individual situation, longevity and the contract design. These [decisions] require a lot of understanding of the clients and the products.”

In general, financial advisers begin their analysis by considering two questions: How long is the client likely to live? How can they invest either to meet or surpass the rate at which the guaranteed living or death benefit would grow? The tax impact of accepting the higher account value and cashing out is another major factor.

Once clients receive a settlement offer, advisers need to weigh the difference between what the company is willing to pay, the actual account value and the value of the benefit.

How the offers are arrived at differs among the three companies proposing settlements.

Transamerica, for instance, is offering eligible clients 80% of the accumulated value of their guaranteed-minimum-income benefit to drop the feature.

“It's the most advantageous offer,” said David Moskovitz, a senior vice president and financial adviser at The Moskovitz/O'Brien Investment Group of RBC Wealth Management. Most of his clients being offered the VA buyout otherwise would get 6% or 6.5% payouts for life.

However, replicating those results outside of the annuity would be difficult. So a settlement doesn't make sense in many cases, unless a client is terminally ill and needs the money immediately.

As an alternative, Mr. Moskovitz has explored annuitization of the Transamerica contract, which would require activating the GMIB rider and selecting the funds in which he plans to invest the annuitization value. This way, clients collect a minimum amount of income even if the markets perform poorly, and they have the opportunity to earn more if their investments fare well, he added. Annuitization brings an end to the fees tied to the contract.


But what about a situation in which clients are asked to consider an offer to walk away from their death benefit, as is the case with Axa? Mr. Cortazzo has clients whose death benefits are growing at rates upward of 6% and who are receiving offers. In that case, investors should question whether their heirs need the money.

One possible solution Mr. Cortazzo has explored, particularly if the contract owner's children are the death benefit beneficiaries and very wealthy, is to have the children purchase the annuity from their parents for the same amount offered by the carrier. The client can then change the ownership of the contract to the child. Further, the parent still gets cash upfront if he or she needs it.

Eligible clients who take The Hartford's offer, which is for legacy contract holders who own the Lifetime Income Builder II rider, will get the contract value on the full surrender date or the contract value plus 20% of the payment base, subject to a cap of 90% of that payment base. The carrier will calculate the enhanced surrender value as of the valuation date after receiving the appropriate paperwork.

Annuity gatekeepers believe that the offer from The Hartford will affect the most clients because prior to the recession, the insurer was a top seller of VAs. Broker-dealers are preparing to contact affected advisers and their clients to ready them for an onslaught of offers.

“It'll be harder this time; there are more clients and advisers,” said Scott Stolz, president of Raymond James Insurance Group. The firm expects 2,700 contracts to be affected by The Hartford's offer.

“The stance is still the same: For those with a big cash need and a short life expectancy, it might make sense,” Mr. Stolz said. “But everyone else can stick with what they have.” Twitter: @darla_mercado


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17


Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video


Vanguard's Joe Davis: Prepare for lower expected returns

The next five years will be more challenging for the markets than the past five, according to Joe Davis, global chief economist at Vanguard. Here's why it's more important than ever to stay reasonable with return expectations and stick to the plan.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

HighTower faces pressure to let investors cash out

After an IPO planned for last year didn't happen, the company could opt to satisfy its backers with a sale.

Envestnet to buy FolioDynamix

The deal, which is expected to close in the first quarter of 2018, will bring the total assets Envestnet works with to almost $2 trillion.

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print