Hartford's VA redo could kill off living benefits for some clients

Failure to respond to new restricted investment menu could see rider yanked; 'off guard'

Jun 6, 2013 @ 3:20 pm

By Darla Mercado

Advisers who sold Hartford Life variable annuities are in for a busy summer tracking down clients who hold certain annuities that are slated for major changes. Policyholders who fail to act could lose their benefits.

The company is applying investment restrictions to a swath of legacy VAs with living benefits, and it will pull the rider from clients who don't change their allocations by Oct. 4.

Hartford Life and Annuity Insurance Co. declined to say how many policyholders or how much in assets would be affected by the changes. As of March 31, the insurer had $65.5 billion in variable annuity assets under management, according to Morningstar Inc.

In a Securities and Exchange Commission filing from the end of April, Hartford Life detailed a number of new restrictions that will apply to the insurer's existing block of variable annuity business in an attempt to limit risk exposure.

Hartford is placing investment restrictions on existing account balances for an array of contracts, including the Director M suite. Certain customers with the Lifetime Income Builder rider will need to reconfigure their investments to meet the requirements. Options include a menu of funds that call for a minimum 40% allocation to fixed income and a risk-based asset allocation model also with an allocation to bonds that's upward of 40%.

Clients who fail to make the adjustment will lose their living benefit altogether, according to the SEC filing.

“These restrictions are intended to reduce the risk of investment losses that could require the company to use its general account assets to pay amounts due under the rider,” Hartford noted in its filing.

“We are determined to reduce the size and volatility of our legacy annuity liabilities,” Hartford spokesman Tom Hambrick said. “We have been evaluating a number of contract holder initiatives and other actions to reduce the risk embedded in these liabilities.”

Clients whose rider is terminated will have one opportunity to reinstate it by reallocating their contract value within 15 days of termination. But they will lose the right to reinstate the rider if they make a premium payment, take a partial surrender or make a covered life change. Customers with reinstated riders will reset their payment base either to what it was before the termination or to the contract value as of the date of the reinstatement, whichever is lower, according to the filing.

Advisers are scurrying to hunt down policyholders who are affected by the changes. The fact that clients need to follow up or lose their living benefit is problematic because the investors may have moved on since they bought the contract and could be hard to track down. There always will be a couple of clients who won't respond, too.

“If the adviser isn't taking the steps to put the client into one of these models, what would happen if the letter went to the client but they changed addresses or if it got lost in the mail and the client loses their benefit because they didn't act?” asked Thomas Fross, president of Fross & Fross Wealth Management.

“How much liability could we share if we didn't reallocate the client and we caused them to lose their guarantee?” he asked. “This is one of the boldest steps I've seen an insurance company take in trying to rid themselves of their liability.”

Numerous other restrictions will be thrown in with a start date of Oct. 4, according to the filing. The Hartford will end its dollar-cost-averaging-plus program, stop contract reinstatements after clients ask for full or partial surrenders and prevent contract owners from pushing out the date of their annuity payments, even though such extensions have been granted in the past. The annuitization must begin at either the tenth anniversary of the contract or the date the annuity holder reaches 90, whichever is later.

Other limits include the company's decision to stop taking new allocations or premium payments to the variable annuity's fixed accumulation feature, which credits interest to balances that are allocated there.

Though these updates came out of the blue for advisers and clients, insurers —including Hartford — have clauses in their existing contracts that will give them the leeway to make these kinds of changes at will.

For instance, they can raise fees up to a certain amount or they can reserve the right to place limits on how clients invest, noted Tamiko Toland, managing director of retirement income consulting at Strategic Insight.

“I can see why advisers and clients would be taken off guard,” she added. “Many may have not been aware of those clauses in the first place or they may have forgotten about it.”

Though Hartford once was the top seller of variable annuities, the company has been whittling away at its VA assets under management. The insurer no longer sells new contracts, having sold off that capability to Forethought Financial Group.

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