On Retirement

Readers weigh in on annuity buyout offer

The majority urge the columnist to stick with her guaranteed income contract

Jan 23, 2019 @ 1:34 pm

By Mary Beth Franklin

As a nation, we have become accustomed to divided politics. As a financial planning community, we have our own version of contentious issues, and one of those hot-button issues involves variable annuities.

When I asked InvestmentNews readers to weigh in on whether I should accept or reject a recent buyout offer for my annuity contract from Ohio National, the reaction was swift and vociferous. You would have thought I shouted "Build the wall" at a Democratic fundraiser! I feel as if I am facing my own personal Brexit moment: Should I stay or should I leave?

Several readers expressed thanks to me for sharing the details of the company's buyout offer as a way to sink their teeth into a real-life case study. I am equally grateful to the scores of readers who posted their recommendations in the comments section following the original article or emailed me directly with their detailed analyses.

The recommendations ranged from "retain the contract" to "dump the annuity," with a host of thoughtful strategies and important questions in-between.

To recap my situation, I used a portion of my qualified retirement savings to buy a deferred variable annuity with a guaranteed minimum income benefit, or GMIB, rider from Ohio National Insurance Co. in September 2009, six months after the stock market had reached its nadir, when the country was still ravaged by the Great Recession. With an eye toward my retirement, which would start in about 10 years, I wanted to create some future guaranteed income.

I purchased an ONcore Flex contract with a guaranteed minimum income benefit rider that reset annually. My contract includes two balances: my actual account balance based on market performance and a guaranteed benefit that continues to grow by at least 6% per year or the highest anniversary value, whichever is higher. The contracts' annual mortality and expense fee is 1.5% of the cash value. The GMIB rider costs an additional 1.5% of the guaranteed amount.

The contract allows me to withdraw up to 6% of the guaranteed amount each year without annuitizing. The withdrawals reduce the benefit base dollar-for-dollar. There is also a "no lapse" provision, which means my actual account balance could fall to near zero and I could still annuitize by age 85 based on the guaranteed benefit amount at that time for the rest of my life or for 10 years, whichever is longer.

My current account balance is about $324,000. The guaranteed amount is more than $508,000 — a spread of about $184,000. Ohio National offered to pay me half of that $184,000 enhanced value — roughly $92,000 — to cancel my contract. Added to my actual account balance, it means I could walk away with about $416,000.

I posed this question to readers: If I took the buyout, how would I use that $416,000 to generate secure retirement income that could beat the $30,000 a year that I could take now through the annuity?

The bottom line: Most of the respondents recommended that I reject the buyout offer. In all fairness, this is not a scientific survey, as all of the respondents volunteered to comment and I have no way of knowing how many embrace annuities versus how many are flat-out subscribers to the Ken Fisher "I Hate Annuities" camp.

"We have completed a massive evaluation and in about 93% of the cases we have determined the benefits are too great to accept the buyout offer," Andrew Cook of Berman McAleer Planning in Timonium, Md., wrote in a lengthy memo outlining my options.

"The present value of the 6% GMIB, plus the annuitization, far exceeds what is available on the market, and the contract dramatically protects against sequence of return risk," Mr. Cook explained as the main rationale for keeping the contract.

"Clients sleep better at night with a portion of their portfolio protected, especially given where we potentially are in the market cycle," he added.

Mr. Cook said maintaining my contract is "real no-brainer because of the spread between the market value and the guaranteed base."

Several readers raised concerns about a continued relationship with Ohio National after the company announced it would no longer pay trailing commissions to advisers on existing contracts.

"Ohio National offered one of the richest contracts this adviser ever recalls," wrote Cheryl Glazer, an adviser with Questar Asset Management in Wynnewood, Pa. "But when a company like Ohio National seeks relief from its earlier commitments, this should portend a wider, deeper industry-wide conversation." The comment about broken promises is fitting given that Ms. Glazer is also president of the Association of Divorce Financial Planners.

Others raised questions about the possible future insolvency of Ohio National and cautioned me to investigate the limits of my state's insurance guarantee fund. Such a situation would not impact the market value of the account but could affect guarantees.

All valid points.

The optimal strategy is to strip the policy by taking the maximum rollup-supported withdrawals immediately, said one reader, who identified himself as an actuary who wanted to remain anonymous.

"In that way you extract the account value, and even with zero account value, your benefit base is still at the original level allowing income for life," he wrote.

He cited an article written by Michael Kitces in 2013 and said its advice about what to do with an existing annuity with guaranteed income benefits is even more appropriate today.

"Just because the annuity might not have been ideal in the first place doesn't mean it should be cancelled now, especially if the benefit base is in fact significantly higher than the current cash value," Mr. Kitces wrote. "In fact, taking ongoing withdrawals from the benefit base may actually be the best course of action at this point."

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