Some could break even with Axa's latest VA buyout offers

Some advisers, clients could come close to breaking even with the deal

Sep 29, 2013 @ 12:01 am

By Darla Mercado

Financial advisers and clients are getting Axa Equitable Life Insurance Co.'s second wave of variable annuity buyout offers, and the verdict is mixed.

In July, the insurer filed an offer with the Securities and Exchange Commission, giving a certain group of clients who own its Accumulator variable annuity the option to terminate their guaranteed-minimum-income benefit, guaranteed-minimum death benefits and earnings enhancement benefit features. In exchange, these customers will get an increase in their account value, plus the opportunity to withdraw the entire amount free of surrender fees.

The offer is voluntary, and clients can choose to keep their contracts and features.

The size of the increase will be based on the client's life expectancy, the actual and projected account value, current interest rates, and the present and projected value of the guaranteed benefits. In general, clients can expect to be offered about 70% of the actuarial valuation of the reserves for the GMIB and GMDB, or two times the annual fees for the GMIB, GMDB and the EEB, based on the current benefit base — whichever is greater.

Notably, though, the offer will vary day to day and will be based on market conditions.

According to the filing, the offer was made to clients with Accumulator variable annuity contracts issued between 2004 and 2009.

Income benefits like those that are on the table are scarce in the marketplace these days. Axa's income feature included roll-up rates — the rate of growth the insurer would credit to the base used to determine an income stream — of up to 6.5%.

These days, the norm for roll-up rates is closer to 5% and below.

Todd Solash, head of individual VA business and in-force management at Axa, noted that the offer just recently went to consumers, so it is too early to expect much consumer response.

“We were happy enough with [the previous buyout offer] to expand it to a much larger pool of policies,” he said, emphasizing that it is a voluntary offer.

“Feedback has been on the positive side. Many people are happy with what they have, and in that case, nothing changes. For those with different needs ... it's a limited-time offer to get that liquidity,” Mr. Solash said.

Advisers traditionally have pushed back against these offers, encouraging clients to stay in their contracts, particularly if there is a significant difference between the size of the benefit base and the actual account value. It would be hard to find similar guaranteed features on today's annuities.

Shrinking cap

But for some clients, the gap between the value of the income and the amount in the account has shrunk significantly.

Those clients may come close to breaking even, said Michael L. Rosenberg, an adviser at Diversified Investment Strategies LLC.

Whether they leave depends on the clients' objectives, their time horizons and whether there are attractive alternatives out there.

“That's what people have to face: If you don't want the money [in a lump], then take the income,” Mr. Rosenberg said. “Unlike past buyouts, which were mostly on death benefits, this is real money.”

Lisa A. Schomer, an adviser with LPL Financial LLC, so far has had one client come in to discuss an offer. Given that he is in his 50s and has a 6.5% GMIB benefit, she will likely tell him to stick with the contract.

“I would be more apt to say that we stay with the benefit, but if his time frame or goals for this portion of the portfolio have changed, we'll re-evaluate it,” Ms. Schomer said.

Rejecting offer

Mitchell Kauffman, managing director of Kauffman Wealth Services, not only has clients who have received the offer, but wound up getting one himself for an Axa contract he owns.

“Given what Axa is offering, and comparing it to other products in the marketplace, the recommendation has been to not accept the offer,” he said.

The $13,000 offer that Mr. Kauffman received for his $242,000 contract would leave him about $1,000 shy of his income benefit base's value. Axa also offered to waive a $6,000 surrender fee if he were to liquidate the contract.

Mr. Kauffman decided to stay put.

“It seemed that everything is opportunity cost. What can you do with the money that's better?” Mr. Kauffman said.

“The structure is so much better than anything we can replace it with that I am hard-pressed to recommend that people take it,” he said.

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