Zurich restricts contributions to popular variable annuity contract

Zurich American Life Insurance Co. is putting the clamps on additional contributions into its legacy Scudder Destinations variable annuity, a contract that was so generous, advisers have described it as “legendary.”
The life insurer released a prospectus supplement dated July 24, announcing that it would cap the maximum total purchase payments existing clients can make to their Scudder Destinations contracts at $10,000 as of Aug. 1. That’s a sharp reduction from the limit of $1 million — the maximum amount allowed as recently as this spring, according to the May 2014 prospectus. The minimum amount a client can contribute to a contract is $500.
In the supplement, Zurich also said it would stop accepting rollovers of transfers into qualified plan contracts as of Aug. 1. The changes won’t force any money out of the contracts, and deposits made prior to Aug. 1 won’t be affected.
Once available in the 1990s, the Scudder Destinations contract is no longer available for sale to new clients. Zurich has managed its in-force business as a closed block for about 11 years.
News of the newly stated limits shook up the broker-dealer community. For one thing, advisers were given mere days to take in the announcement. Bruce Cacho-Negrete, an adviser with the Margaret C. Starner Group of Raymond James & Associates Inc., said the letter he received from Zurich announcing the changes was postmarked July 29.
“Even if we had wanted to add money, they made it impossible to do,” he said. “This is a legendary contract. We have 35, 40 clients who would be affected by this, and they were planning to add money to the contract at some point.”
The Scudder Destinations contract was a favorite among advisers who gravitated toward it because it had a dollar-for-dollar guaranteed death benefit that would also receive “step ups” in value — which is why they refer to it as “legendary.” The dollar-for-dollar benefit reduced the value of the death benefit by the exact dollar value of the withdrawals made from the account, which is a terrific deal for the client but not the best for the insurer.
For instance, if a client’s account value and death benefit were each valued at $200,000, and a market downturn reduced the actual account value to $100,000, clients were permitted to withdraw up to $99,500 of the account value — meaning that even though there’s only $500 left in the actual account, the insurer is still on the hook for death benefits valued at $100,500.
“You’d get into the company’s pocket immediately,” said Mr. Cacho-Negrete.
“It was definitely a wonderful program,” recalled Mark Cortazzo, senior partner at Macro Consulting Group, of the Scudder Destinations annuity. He has two clients who added money to their contracts in the last 30 to 45 days.
“This is what happens when you get a company that’s no longer in this line of business,” Mr. Cortazzo added. “I’m not surprised they shut it down, and I’m not surprised they gave virtually no notice.”
In the May 2014 version of the Scudder Destinations prospectus, Zurich added a phrase that appeared to pave the way for the sharp cut in maximum contributions: “We reserve the right to waive or modify the minimum and maximum initial and subsequent purchase payments limits.” That verbiage wasn’t present in the May 2013 version of the prospectus.
Zurich stood by the change. “This action is consistent with Zurich’s rights under these contracts,” wrote spokeswoman Robyn Ziegler in an e-mail. “The reduction of the deposit cap is a move that enhances Zurich’s ability to benefit our stake holders, and comes following a sharper focus and thorough review of the product.” She noted that the company announced in December that a key component of Zurich’s strategy is “to strengthen the value of in-force business for our customers.”
Zurich did not make any of its executives available for comment.